A lesson or two from GSK's Chinagate

GlaxoSmithKline's (GSK's) Chinagate scandal of the past few weeks provides some belated insight on the China fantasy that pharma has been peddling to investors for much of the last decade.

The basic pretense that pharma could somehow offset its wave of patent expirations, its dearth of compelling new products and the greater demand for value from payers was never persuasive.  That didn't stop most if not all Big Pharma CEOs from telling everyone that the rising middle classes in the emerging nations would bring record profits to the entire industry.  At one point AstraZeneca's former CEO, David Brennan, told his vice-presidents that henceforth, regardless of the question, China was the answer.

Within the past year reality started emerging faster than the rise of those middle classes.  First it became apparent that the developing nations would supply most of the growing demand for better medications with off-patent generics.  Then on the high-priced brands that generate the big profits, China and India showed they would aggressively force down prices by using compulsory licensing (i.e., breaking patents) if necessary.

Just as these lessons started oozing through pharma's walls of denial and arrogance, the Chinese authorities detained several GSK employees in that country whom they accused of bribing physicians, hospitals and health officials.  The process involved laundering the illicit payments though local travel agencies.  (See here and here.)

Then as this payoff scandal started unrolling, the Chinese also exposed a massive R&D scandal at GSK's research facilities there.  In this one their researchers regularly and systematically committed ethical violation involving such things as testing compounds on people before conducting animal studies (see here). 

It now appears that one of the unstated sources of fascination with China in the pharma C-suites was the idea that the world's most populous nation represents a contemporary version of the wild west where cash rich companies can bribe their way to fortunes.

In any case, the Chinagate scandal yields more than enough blame to go around.  For GSK's part it seems they have been practicing rampant, systematic corruption in China even after paying a $3 billion fine to settle a variety of US charges.  This should indicate that anytime someone dismisses the characterization of pharma as a corrupt industry by claiming those practices occurred years ago, be advised that the industry defender either has his head under a rock or up his rear end.  

Yes, changes and even some improvements have taken place over the past few years, but their effect has been to put the source of corruption at higher levels within the pharma companies.  That means there are fewer cowboy reps and district sales managers bribing docs because the corruption is now in the hands of operations directors, VPs and even higher positions.

The Chinese government and economy are not squeaky clean on this matter either.  For the most part the drug bidding and distribution systems in China are enormously corrupt.  GSK made the poor choice of deciding that it had to partake in that corruption in order to compete there.  

The Chinese government eagerly exploited the payoff scandal because they know that cleaning up their own bidding and distribution processes would ruffle too many domestic feathers.  Pointing instead to the corruption of foreign-based, multinational pharmas might represents an easier, backdoor means of reforming their system.

But acknowledging this political expediency on the part of the Chinese government doesn't in any way suggest that pharma's cheerleaders were correct in trying to completely lay the GSK Chinagate scandal at the Beijing government's feet.  As the story started emerging, some pharma apologists claimed the Chinese government was making up the whole thing.  Other industry flacks maintained the deeply corrupt nature of the Chinese political economy simply forced reluctant pharmas such as GSK to run these payoff schemes.

As the lawyers say, that last argument may mitigate the damages but it in no way exonerates the defendant (pharmas).  Instead pharma clearly illustrates the point that western, late-stage capitalism turns to corruption when R&D ceases to create innovative products that people want, when marketing-sales can no longer sell the same old products, and when accounting tricks can no longer appease investors.  That downward slide into criminal conduct applies whether it's China or anywhere else.

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