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Analysis: Bribery scandal dents Big Pharma sales in China, GSK hardest hit

The GlaxoSmithKline building is pictured in Hounslow, west London June 18, 2013. REUTERS/Luke MacGregor
The GlaxoSmithKline building is pictured in Hounslow, west London June 18, 2013. REUTERS/Luke MacGregor

By Adam Jourdan, Kazunori Takada and Ben Hirschler

SHANGHAI/LONDON (Reuters) - A crackdown on corruption in China's pharmaceutical sector has hurt sales at international and local firms, with many doctors at Chinese hospitals refusing to see drug representatives for fear of being caught up in the widening scandal.

Britain's GlaxoSmithKline Plc, the group at the center of the furore, has suffered the most. Industry insiders expect its China drug sales growth to slow sharply or even reverse in the third quarter after a 14 percent year-on-year rise in the three months to end-June.

But GSK - accused by Chinese police in July of using travel agencies as intermediaries to make illegal payments to doctors - is not alone, and a number of companies say their China sales in the second half of the year may take a substantial hit.

With the country's healthcare spending forecast to nearly triple to $1 trillion by 2020 from $357 billion in 2011, according to consulting firm McKinsey, China is a magnet for makers of medicines and medical equipment.

However, a string of investigations and visits by authorities to the China-based offices of global firms has sent a chill through the industry, prompting businesses to step up internal compliance and rein in sales teams.

Corruption in China's healthcare industry is fuelled in part by low base salaries for doctors at the country's 13,500 public hospitals, the main buyers of drugs.

"There is an awful lot of confusion out there," the chief executive of French drugmaker Sanofi SA, Chris Viehbacher, told a conference in London last week.

"There was more of an impact in August and we are seeing less of an impact in September, but I think you will probably find, for at least the next couple of months, turbulence in the marketplace in some sectors."

Pharmaceutical sales staff said their hospital visits had been slashed - both because sales reps are struggling to get access to doctors and because firms are playing it safe.

The cutback in promotional activities has forced a number of drug companies to scrap monthly or quarterly sales quotas.

"There's a fall in sales for sure," said a Shanghai-based sales rep at GSK, who declined to be identified because he was not authorised to speak to the media.

"Because of the current situation and rumours about peers being taken away by authorities, we're going into hospitals less and less. We're worried the same may happen to us," he said, adding the lull in work meant he was spending more time drinking tea and worrying about redundancy.

DOCTORS "REELING"

Simon Li, China general manager for healthcare information firm Kantar Health, said the probes had led to a "substantial sales decline", especially in August.

"Multinational companies have cut back on almost all their marketing activities. Some companies have told their sales reps to stay at home or take a vacation," he said.

A former drug sales rep told Reuters that doctors who would normally see at least 10 sales staff a day had been spooked by the anti-corruption drive - a view echoed by executives at multinationals in China.

"A lot of doctors were sent reeling by this and they decided they just did not want to see anybody - but more recently things seem to be getting a bit more back to normal," said the head of pharmaceuticals at one large drugmaker, who spoke on condition of anonymity because of the sensitivity of the topic.

A distributor working with foreign drugmakers in China said that while GSK products had suffered an outsize hit, anecdotal evidence suggested overall growth rates for overseas drug firms had slowed to around 8-10 percent from some 20 percent in 2012.

A spokesman for GSK in Britain said the firm was continuing to operate its business and supply healthcare products to patients in China.

"However, as we expected, we are seeing some impact to the business as a result of the ongoing investigation," he said, declining to give specific sales projections for the third quarter.

GSK has said some of its senior Chinese executives appeared to have broken the law after police accused it of funnelling up to 3 billion yuan ($490.08 million) to travel agencies to facilitate bribes to doctors to boost the sale of its medicines.

The company generated a modest 3.6 percent of its global drug sales in China last year but sees the country as an important source of future revenue.

CHINESE FIRMS IN SPOTLIGHT TOO

Other large international drugs manufacturers including Novartis AG, AstraZeneca Plc, Sanofi, Eli Lilly & Co and Bayer AG have also been visited by Chinese officials in recent weeks.

More recently the investigations have spread to domestic firms.

China's Sino Biopharmaceutical Ltd said bribery allegations aired on Chinese state television last week would hit sales team morale and drag on second half growth, Deutsche Bank said in a research note.

Privately-held Gan & Lee pharmaceutical, in which U.S. investment bank Goldman Sachs Group Inc holds close to a 10 percent stake, is also investigating corruption allegations.

The probes have brought compliance to the fore.

The head of one distributor who works with international drug firms in China said his pharmaceutical clients had called him to check on various elements of his distribution network.

"They are nervous and want to ensure compliance," he said, declining to be named because of the sensitivity of the issue.

Industry executives said weeding out corruption would be tough because bribes were viewed as top-up pay by doctors.

Milk powder makers, who often sell to hospitals, have also been caught out, with French food maker Danone SA saying it was investigating bribery allegations after a Chinese TV report this week.

"Pharma companies are just going to find ways around it. Some got caught because they used one or three travel agents, so they're just going to use loads, or find another way to channel the money," said a China-based executive at a foreign drugmaker.

"Until doctors stop taking bribes, nothing is going to change."

(Additional reporting by Shanghai Newsroom. Editing by Dean Yates)

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