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China launches crackdown on pharmaceutical sector

A Chinese national flag is seen in front of a GlaxoSmithKline office building in Shanghai, July 12, 2013.REUTERS/Aly Song
A Chinese national flag is seen in front of a GlaxoSmithKline office building in Shanghai, July 12, 2013.REUTERS/Aly Song

By Megha Rajagopalan and Michael Martina

BEIJING (Reuters) - China announced a nationwide crackdown on the sale of illegal medicine on Wednesday and said it would tighten industry regulation, piling pressure on a sector already reeling from a bribery scandal at British drug maker GlaxoSmithKline.

The State Food and Drug Administration said the six-month campaign would also target illegal online drug sales and the sale of fake traditional Chinese medicine. It gave no details on possible changes to regulation.

"We must resolutely punish illegal acts, expose illegal enterprises, recall problematic products," Wu Zhen, the agency's deputy commissioner, said in a statement.

The crackdown comes two days after Chinese police accused GlaxoSmithKline of bribing officials and doctors to boost sales and raise the price of its medicines in China.

Police said GSK transferred up to 3 billion yuan ($489 million) to 700 travel agencies and consultancies over six years to facilitate the bribes. In response, GSK said it was deeply concerned by the developments, which it called "shameful".

The food and drug agency did not specifically mention GSK, but a spokesman for China's Commerce Ministry said authorities would not hold back punishing companies engaged in bribery.

"Whether it's a domestic or foreign-invested enterprise, once it has violated Chinese law, it will be sanctioned," Shen Danyang told a news conference.

Widespread counterfeit drugs and false advertising have been a thorn in the side of Chinese regulators for years, and the drug agency has conducted campaigns in the past to crack down.

Last August, Chinese police detained almost 2,000 people in a sweep on fake drugs, seizing more than $180 million worth of counterfeit products and destroying some 1,100 production facilities.

The seized fake drugs purported to deal with illnesses ranging from diabetes to high blood pressure and rabies and had been advertised on television, online and in newspapers.

Beijing also promised to clean up its act following the deaths of at least 149 Americans who received contaminated Chinese supplies of the blood-thinner heparin in 2008.

COSTLY MEDICINE

But the country's complicated and still developing regulatory environment has stymied efforts at tackling the problem, which infuriates Chinese consumers, who also express anger at what they see as the high price of legitimate medicine.

Often, big Western companies package older medicines under their own labels as "branded generics" in emerging markets such as China, where the drugs command a hefty premium to ones made by local suppliers given their reputation for quality.

A commentary in the People's Daily newspaper said China must "lift a sharp sword to pierce the improper, even illegal, costs behind rising drug prices" for which multinationals, such as GSK, were responsible.

China's planning agency, the National Development and Reform Commission (NDRC), is examining prices charged by 60 local and international drug makers including units of GSK, Merck & Co Inc and Astellas Pharma Inc.

The pharmaceutical sector was a "disaster zone", said Willy Lam, adjunct professor of history at the Chinese University of Hong Kong.

"This seems to be the largest and the best orchestrated effort to target multinationals ... they seem to be blaming foreigners for problems they cannot solve themselves," said Lam, who closely follows corruption issues in China.

Underscoring the heat on foreign companies, a separate commentary in the People's Daily called for a crackdown on commercial bribery by multinational firms in general.

It accused some of using their market dominance to exploit gaps in regulatory systems in developing countries.

"A crackdown on commercial bribery by multinationals is deeply significant to safeguarding the order of the market economy and protecting an environment of fair competition," said the commentary in the mouthpiece of the ruling Communist Party.

Project bidding and tax systems for multinationals were also problematic, the commentary said, without giving details.

FOCUS ON FOREIGN FIRMS

Some experts have suggested China may be expanding an anti-corruption drive beyond government ranks and domestic companies including state-run entities, focusing now on foreign firms.

China has targeted foreign firms on multiple fronts in the past few months, although the probe into GSK is the only high-profile, publicly known investigation focused on bribery.

European food companies Nestle and Danone said early this month they would cut infant milk formula prices in China after Beijing launched an investigation into the industry.

Chinese media has been giving the GSK story plenty of attention.

On Tuesday night, state broadcaster CCTV aired an interview with one of four detained Chinese executives from GSK.

Liang Hong, vice president and operations manager of GSK (China) Investment Co Ltd, offered details on how he funneled money through travel agencies by arranging conferences, some of which were never held.

"To have contact with some government departments you need money that you cannot normally expense to the company," Liang said during the broadcast.

Liang said he paid bribes to officials from the NDRC as well as the Ministry of Labor and Social Security, which are among those required to get medicines approved or prices set.

It is rare for state TV to carry such interviews, although state news agency Xinhua had earlier been given access to Liang.

(Additional reporting by Wang Lan in BEIJING and Adam Jourdan in LONDON. Editing by Dean Yates)

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