What's the cure for China's corruption crackdown? Hire more locals

Richard Bergström

Big Pharma's reputation in China has taken a bruising in the last year after an investigation into GlaxoSmithKline's ($GSK) use of bribery to power sales there spilled over to questions into Roche ($RHHBY), Novo Nordisk ($NVO) and others. So what's the industry to do to burnish its image and smooth over the situation with authorities? Hire Chinese nationals who can figure out the puzzle box that is Chinese healthcare.

And that is what some of them are doing, Richard Bergström, director general of the European Federation of Pharmaceutical Industries and Associations in Brussels, acknowledges to Bloomberg, without naming names. Putting executives on the ground who speak the language and understand the country's regulatory system, Bergström said, will improve the oversight of local sales and marketing efforts. "In order to do audits further down in the organization, and in order to understand what's going on, they need people on the ground," Bergström told Bloomberg.

In May, following a months-long probe, GSK was charged with bribery stemming from allegations that it funneled millions of dollars worth of bribes to healthcare workers through travel agencies. Three GSK execs are facing bribery charges, including the former head of its operation there, Mark Reilly. The problems in China have also caught the attention of authorities in the U.K. and the U.S. Both countries are investigating under foreign corruption laws.

Bergström admits, however, that hiring locals will only go so far in helping companies navigate China's healthcare system. He told Bloomberg that he believes Chinese authorities also need to remove longstanding incentives that promote corruption. For example, some hospitals there derive up to half their revenue from prescribing drugs and procedures, which Bergström says may cause over-prescribing.

"Despite years of attempts and numerous reports, they've not been able to take out these strange incentives in the system," Bergström told Bloomberg. "For a Western company coming in with its rules and hopefully its values, it is very difficult to operate in an environment where the other side is not governed properly."

Sanofi CEO Chris Viehbacher disagrees with Bergström's assertion that hiring more locals will help companies fend off corruption investigations in China. His company is doing nothing of the sort, he told Bloomberg.

"We are just all going to have to learn how to make sure we know how to do business there," Viehbacher said. "Stamping out corruption makes it a level playing field."

- here's the Bloomberg story