GlaxoSmithKline navigates difficult path in China after scandal


November 26, 2015 4:36 pm

GlaxoSmithKline navigates difficult path in China after scandal

New rules to tackle corrupt practices leave drugmaker at a commercial disadvantage, say industry peers
File photo of a Chinese national flag fluttering in front of a GlaxoSmithKline (GSK) office building in Shanghai...A Chinese national flag flutters in front of a GlaxoSmithKline (GSK) office building in Shanghai in this July 12, 2013 file photo. British drugmaker GlaxoSmithKline used travel agencies and consultancies as vehicles to bribe officials and doctors and illegally boosted the sales prices of its drugs sold in China, police said on July 15, 2013. REUTERS/Aly Song/Files (CHINA - Tags: BUSINESS)©Reuters

When Hervé Gisserot was asked to ride to the rescue of GlaxoSmithKline’s crisis-hit Chinese operations in 2013, the job must have looked to be a poisoned chalice.

His predecessor, Mark Reilly, was under criminal investigation — and later detained under house arrest — for his part in a corruption scandal that led to GSK being handed the biggest fine in Chinese history.

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Since arriving in Shanghai two years ago, Mr Gisserot has remained largely out of public view as he has sought to salvage GSK’s position in the world’s second-biggest pharmaceuticals market after the US. The fact he is now willing to talk openly for the first time about the crisis suggests the Frenchman thinks the worst has passed.

“The mindset was more, more, more,” he says, describing the hard-selling culture that prevailed at GSK before Chinese investigators uncovered the web of bribery used to encourage doctors to prescribe its drugs. “We will not win in the future as we have in the past 10 years. We have to invent a new model.”

After years of lax oversight that ended in disaster, GSK now has the toughest anti-graft rules in the Chinese market. Sales representatives are no longer paid according to how many drugs they sell — removing one of the main incentives for bribery. Doctors, meanwhile, are no longer entertained by GSK reps on expenses, nor paid to speak on the company’s behalf at promotional events. The company no longer uses Chinese travel agents. Instead, every receipt submitted by a rep is now checked by in-house compliance officers who have tripled in number since the crisis.

Mr Gisserot hopes these measures will greatly reduce the risk of corruption and help repair the company’s reputation by eliminating many of the opportunities. In the past, faked lunch receipts were used to generate cash for bribes and doctors were paid for speaking engagements that never took place.

Whether the changes will lead to recovery in the business is another question entirely at a time when GSK is in urgent need of fresh growth after a period of declining global sales. Its earnings per share fell both last year and this, and its biggest drug, the asthma treatment Advair, could soon face generic competition.

We fully support that sales is not the only factor. But performance has to be one element of compensation

Several industry figures and drug reps told the Financial Times they believed the new model would leave GSK at a commercial disadvantage in China and other emerging markets. One rep said that “doctors will only prescribe GSK drugs if they have to”; given a choice, they are more likely to opt for the product whose reps are still able to offer incentives.

Even if western drugmakers are increasingly avoiding paying direct bribes, some still turn a blind eye when it is carried out by local partner companies, the reps say.

A compliance officer at a competing western drugmaker says that an audit of payments to doctors for speaking at medical meetings revealed 60 per cent of events never took place. In other words, doctors received money for nothing.

In contrast, the best a Chinese doctor can expect when meeting a GSK rep is a lunchbox worth Rmb60 ($9.40). Reps, meanwhile, have had their base salaries increased from 60 to 75 per cent of total potential remuneration, with the remainder made up by a new bonus system based on measures including a test of their product knowledge and a GPS tracking system that logs their number of meetings with doctors.

The only element of the bonus linked to sales is tied to GSK’s overall performance in all emerging markets.

Mr Gisserot says reps have responded well to the changes. However, any enthusiasm is not universal. One GSK salesman complained to the FT that his overall pay had fallen 25 per cent under the new model. He also claims to have already found ways to get around rules designed to make corruption impossible.

Speaking on condition of anonymity, he explains how he uses the GPS-enabled iPad intended to monitor interactions between sales staff and doctors near a hospital, without actually meeting any doctors. “Sometimes I just spend the time in a coffee shop near the hospital,” he says.

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A GlaxoSmithKline Plc logo sits on glass windows at the company's headquarters in London, U.K., on Thursday, July 11, 2013. Glaxo is suspected of trying to increase sales channels and prices by using avenues such as travel agencies to bribe or sponsor projects of government officials, medical associations, hospitals and doctors, and faking tax receipts, China's Ministry of Public Security said on its website today. Photographer: Simon Dawson/Bloomberg

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To collect his basic salary, he says, it is enough just to pass the medical knowledge tests that GSK administers periodically — giving him ample opportunity to quadruple his salary by working on the side for a domestic pharmaceutical company. That company still upholds a policy of allowing him to hand out cash to doctors to boost sales, and he is able to earn several multiples of his GSK salary as a result.

GSK will hope this anecdotal abuse of its system is an exception, although the salesman says the practice is widespread. The UK company has a lot riding on its ability to make the new model work and so too do Chinese authorities whose clampdown on GSK appeared motivated at least in part by a desire to catalyse change in the pharmaceuticals market.

Mr Gisserot says GSK will have first-mover advantage when the rest of the industry eventually follows its reforms. “I think it will be a domino effect,” he says. “It will be hard for other players to explain why they are sticking to the old model.”

But many in the sector remain sceptical. Numerous industry figures and sales reps in China say that while most companies have tightened their rules, bribery is still widespread. In addition, there is a common view that another GSK-style prosecution is unlikely and therefore companies do not feel under pressure to make fundamental changes.

According to this argument, bribes will remain a cost of doing business as long as poorly paid doctors demand the money to top up their salaries. This will only happen as part of wider healthcare reforms likely to take many years.

GSK is introducing similar compliance models around the world, reflecting the belief of Sir Andrew Witty, chief executive, that, as conflicts of interest between drugmakers and medics face scrutiny from China to the US, it is better to embrace the trend rather than wait for enforced change. Instead of being incentivised solely to sell pills, GSK wants its reps to be respected by doctors as sources of quality information and advice.

The head of one western drugmaker in China insisted it was a mistake to remove animal spirits from sales reps entirely. “To stop linking pay to performance is something we do not understand. We fully support that sales is not the only factor. But performance has to be one element of compensation.”

Mr Gisserot says his counterparts are gambling on the ability of their compliance departments to spot transgressions. “When you have an incentive scheme, it is because you want to drive behaviour . . . If you keep it you create risk. As a legal representative [of GSK in China], I would not feel comfortable about that.”

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