J&J watching GlaxoSmithKline's China situation

Like many executives of big companies operating in China - pharmaceutical and otherwise - Johnson & Johnson officials are watching how the Chinese government is investigating GlaxoSmithKline's operations in that country.

Both drugmakers have big operations and hopes for selling medicine or devices (in J&J's case) in China, but the government's investigation into GSK's business practices have renewed discussion about what works in one country, might not be allowed in another.

Some of that discussion is legal. The U.S. government has prosecuted companies within its boundaries for marketing practices and tried to discourage bribery of foreign officials with the Foreign Corrupt Practices Act. Chinese government authorities say China-based GSK officials were using travel agencies to funnel money to Chinese health care personnel in hopes of selling more medicine.

Some of the discussion is about economic policy. The U.S. government has enacted protectionist laws that apply to various industries at points in its history. As China's market economy has developed in the last 20 years, the government has insisted U.S. and European companies wanting to sell products in the nation also transfer know-how in several ways. It happened in numerous industries, from computers to aircraft. As health care industries and costs to the government have grown, China is doing more to control that sector. China even has its version of the U.S. Food and Drug Administration. The English version of that agency's main web site is here.

In a conference call with reporters on Tuesday, following the release of second quarter financial results, J&J chief financial officer Dominic Caruso was asked if China was pushing protectionist policies related to the pharmaceutical industry.

"It is somewhat of a concern," Caruso said. "It is natural for countries to want to protect their own industries. In health care, one of the things, when we talk to global business leaders and speak with government officials of health-care systems around the world, the U.S. is, quite frankly, the major innovator of health care in drug and devices. Lots of unmet need still exists in these countries and a great deal of the innovation is coming from outside those countries. Most of the officials want to improve the overall health of their societies.

"I'm personally involved in Asia-Pacific economic cooperation organizations and we're always talking about opening barriers so these countries can have more access to medicine and devices. In health care, these governments appreciate that innovations are needed, for addressing unmet needs, and that multinationals like ours can provide that help."

As for specific discussions with China, Caruso declined to say if J&J heard from that nation's regulators.

"I'm not going to comment on specific interaction with any particular government," Caruso said, "but we have a long-standing history of educating and training our leaders and employees in the appropriate business conduct. We have strict procedures. We conduct our own audits and investigations to ensure our businesses are operating within local and international standards."

Caruso discussed J&J's McNeil Consumer Healthcare factory in Fort Washington in Wednesday's Inquirer. Link here. The promo code to get into the site is N93A.

Meanwhile, GSK's statement on the China situation, issued Monday, is below:

"We are deeply concerned and disappointed by these serious allegations of fraudulent behavior and ethical misconduct by certain individuals at the company and third-party agencies. Such behavior would be a clear breach of GSK's systems, governance procedures, values and standards. GSK has zero tolerance for any behavior of this nature.

"GSK shares the desire of the Chinese authorities to root out corruption. These allegations are shameful and we regret this has occurred.

"We will cooperate fully with the Chinese authorities in the investigation of these new allegations. We will take all necessary action required by the outcome of this investigation.

"In the meantime, we are taking a number of immediate actions. We are reviewing all third party agency relationships. We have put an immediate stop on the use of travel agencies that have been identified so far in this investigation and we are conducting a thorough review of all historic transactions related to travel agency use. We also intend to conduct a rigorous review of our compliance procedures in China.

"GSK fully respects the laws and regulations in China and expects all staff to abide by them.

We also fully support the efforts of the Chinese authorities in their reforms of the medical sector and stand ready to work with them to make the necessary changes for the benefit of patients in China."