International Pharma Is Trapped By China’s Corrupting Regulatory Regime

China today is a study in contrasts. It has a highly regimented and controlled political system that also tolerates and even encourages free-wheeling behavior on the part of its business leaders, whether managers of state-owned enterprises or private entrepreneurs. A restrictive regulatory regime and inadequate salaries for many public employees encourages an extremely sophisticated system for circumventing those regulations that, in the process, allows individuals with the ability to manipulate the system to make a lot of money. Cheating and bribery have become the norm in the public educational system, with its focus on the nationwide Gaokao or higher education exams that determine the fate of graduating high school students. Repression coexists with license producing, in practice, a system that is at the same time law-bound and lawless.

Recent reports that employees of the Chinese arm of international pharmaceutical company GlaxoSmithKline (GSK) have been involved in significant, even systematic bribery of government officials and doctors says very little about the ethics of this international giant of the pharmaceuticals industry and a lot about the way the Chinese system works. The Chinese regulatory regime for pharmaceuticals makes it extremely difficult for even the most ethical companies to avoid running afoul of the law. Drug prices are set by the Chinese authorities who also require that they be distributed through a complex network of importers and distributors. It is well-recognized that the Chinese government doesn’t provide enough funding for a decent health care system. Doctors, hospitals and clinics make most of their money from the prescribing of drugs which means they are constantly looking around for distributors who can cut them a deal or provide a kickback. Recently, my son was treated at an eye clinic in Beijing. The doctor’s fee was the equivalent of $1.20 while the price of the prescription for an eye ointment was $12.00. One recent BBC report on the GSK scandal quoted a Chinese doctor thusly “My basic monthly salary is about $600. Without bribery I could not live a decent life.”

In addition, Chinese regulations require that foreign pharmaceutical companies include among their range of offerings local-manufactured products, the marketing of which must be done by a separate sales staff from that which sells foreign-made products. The result is a highly competitive, low-margin business with many barriers to distribution that reduce efficiency and raise costs. It is little wonder that some local employees of international pharmaceutical companies would succumb to what is almost a national past time and bribe officials, hospitals and doctors.

The Chinese government also uses the powers to regulate and investigate as tools for forcing foreign companies to help bootstrap domestic producers in areas that have been identified as critical to the nation. It should come as no surprise to anyone that as popular dissatisfaction with the national health care system has become almost explosive, the government would threaten to expand its investigation of GSK to other international pharmaceutical companies, perhaps seeking to strong arm them to lower their prices and even expand transfers of their intellectual property to local partners.

International standards regarding ethical business practices must be observed. GSK officials are right to say that illegal behavior on the part of any employee will not be tolerated and to take appropriate corrective action. But we should recognize that this most recent anti-corruption campaign, like so many of the past, has very little to do with the alleged crimes. It has everything to do with the current state of Chinese politics, the need to dampen down domestic discontent or at least shift blame onto foreign companies and Beijing’s interest in creating a competitive domestic pharmaceuticals industry.

China has created a system of managed corruption that permits rent-seeking behavior on the part of those who control the regulatory regime and an opportunity of individuals with power and money to circumvent the rules. Today’s high school graduates in China have grown up in this system and know no other way of operating. In many instances, their parents have bought their children’s success using wealth acquired by manipulation of the system. Imagine what these young people will be like when they hold the reins of power in Beijing.