Chasing the Dragon in China

Sept. 20, 2013
China's crackdown may ultimately prompt better, more ethical behavior by capitalist and communist alike

The allure of fast-growing markets and equally bountiful revenue streams continues to attract the world’s most prominent Pharma suppliers to China. But to anyone current on the news and events coming out of this region will attest, making and selling drugs in China has just gotten a whole lot riskier, especially in light of the bribery scandals involving GSK, Sanofi, Novartis and now Lilly dominating the industry’s news cycles this summer. In a recent editorial, Benjamin Shobert, Rubicon Strategy Group’s managing director, finds that regardless of what narrative may ultimately prove best to explain China’s recent crackdown on Pharma — backlash from lax internal enforcement, Chinese intimidation of foreign-owned pharma companies, or the extension of the country’s emerging regulatory regime to control its own industry, “The fact remains that doing business in the sector for multinationals will never be the same.”

As all drug makers are likely aware, to play in emerging global markets like China, new strategic business models are required — ones designed to exploit opportunities while addressing the increasing complexities and risks of extended global supply chains and operations. These strategies are ultimately made more successful with the careful implementation of technologies, processes and procedures — something contributor Doug Bartholomew confirms in his Special Report on p. 20. Unfortunately, even the best-implemented business strategies and technologies can be derailed when the internal dynamics of the market’s political and economic systems create commercial environments that only survive financially from tacitly sanctioned corruption, and I mean that from both sides.

The fact is, doing business in China will never be easy — the struggle to reform its collectivist-based political and economic systems and adapt to the realities of free global market generates an instability that may never be fully reconciled. However, in spite of suspicions that this is just more of the same self-serving political theatre, it does appear that regardless of what is motivating it, the state is attempting to institute reforms and disrupt the cycle of corruption that grew from the effects of its waning centrally controlled economy and the resulting neglect of the country’s maturing health care sector.

Rubicon’s Shobert gives China’s government credit for what it has accomplished and posits that, “For China’s health care reforms to be successful, something along the lines of the GSK scandal had to happen.” China’s State Food and Drug Administration (SFDA) announced in July that it would be conducting a six-month inquiry into the marketing, distribution and sales practices of foreign and domestic pharmaceutical companies within its borders. “In the long-term, the GSK scandal has the potential to become an important event that actually stabilizes the country’s health care system by ensuring that limited funds get allocated more efficiently and directly ...”

Unfortunately, like opiates, corruption can be addictive. Users, once hooked, are loath to give up the certainty of financial reward without some serious disincentives. It can all be so tawdry — what’s interesting is that these and similar scandals often involve the middle/lower layers of a given multi-national’s local sales and business development staffs hard pressed to meet overambitious financial goals without ascribing to bribes and other illegal incentives required to compete successfully.

Call it what you will, this type of corruption is intensively corrosive to free markets and creates perverse incentives that tend to sustain it — especially in centrally controlled economies like China’s.

The phrase “Chasing the Dragon” generally refers to an addict’s unending attempts at pursuing the next, better high. In this instance, perhaps it’s Pharma who’s been chasing the high of big profit in China, toking on the pipe of corruption at least regionally (in a global market sense) to meet sales targets. This cycle is being interrupted and GSK its first target, but it might have been avoided if it looked a bit deeper into how its local business units were meeting the business goals it was mandating in a region known for its institutionalized corruption.

Published in the September 2013 edition of Pharmaceutical Manufacturing magazine

About the Author

Steve E. Kuehn | Editor in Chief