One Company One Defining Moment

Being an observer rather than a participant in the drugs business makes it easier to sense those defining moments when something fundamental has changed, a limit is reached, and a new order emerges to reset the basic license to operate.   As Pharm Exec monthly goes to press, one such moment appears to have arrived, with the trade media ablaze with lurid accounts of bribery, tax fraud, and other illicit  promotional activities in China – ironically, the country touted as guarantor of our industry’s future.  Equally significant is that the chief target of the Chinese government’s assault on corruption in the medicines trade is GlaxoSmithKline, a favorite of the NGO community and a company well known for positioning itself above the grubby fold of its big Pharma counterparts.

Those commanding heights around CSR don’t look so high right now.  Investigation does not automatically infer guilt, but reputation takes a hit when any government – let alone that which manages what is emerging as the world’s largest single-payer health system – references you as “a criminal organization.” Indeed, GSK appears to have missed numerous signals that the Chinese government was moving to adopt its own zero tolerance stance on what our industry obliquely calls “transaction costs.”  Not only was rooting out business corruption a key platform of the recent 18^th Communist Party Congress, it is the governing theme of the country’s new leadership. It has only to remind the industry of its special place in the local league rankings on capital punishment: the first head of China’s FDA, Zheng Xiaoyu, was executed in 2007 for administering his own “pay to play” scheme on drug approvals.

In addition, the magnitude of health system reforms to make China’s 1.3 billion citizens eligible for basic health cover by 2020 effectively requires a huge transfer of income from physician and hospital “profit seeking” –  activity that implicitly depends on keeping prices of branded  [i.e. foreign] drugs high.   GSK’s reported mea culpa to prosecutors – to cut prices of its portfolio of drugs in China – puts it on the right side of the central government in terms of reform.   But until government finds a solution to compensate and replace the income lost to its key health care institutions from extracting ever higher margins from the private sale of medicines, the basic economic incentive for graft will continue.

What this means is that big Pharma has no option other than to unilaterally change its game – and take the hit by lowering expectations on future revenue growth in China and other emerging markets.  You can call it leading from behind – by being up front.

A crucial first step is to plug the organizational disconnects that plague all large drug companies.  In a recent interview with Pharm Exec, former Schering-Plough CEO Fred Hassan said the most important staffing decisions he made were for the country managers in key ex-US markets.  He vetted each and retained open channels even when these positions did not report directly to him.  It does appear that companies where China management is answerable only to the CEO encounter less of the “field rogue” phenomenon.  Another factor that deadens awareness of realities in the field are company cultures that reinforce silo’s and negative attitudes between sales staff and management: while the latter is decisive and strategic, the former is often perceived as complacent – a backward flying albatross.

Michael Vermillion, Senior Director at Navex Global

A second, related element is the anticipation of risks through internal controls. “Accountability for relationships with third parties is critical; these need to be ‘owned’ by an individual, so when that individual moves on, each relationship is reassessed by higher management,” says Michael Vermillion, Senior Director at Navex Global, an ethics and compliance service and software provider. He notes that China’s Ministry of Public Security has charged GSK with transferring nearly $500 million in suspicious payments through travel agencies, running as far back as 2007.   “Not only should business partners be categorized based on potential risk for corrupt behavior – travel agencies are covered under money laundering provisions of the US Patriot Act – but the estimated size and timing of payments should be part of the internal approval process, so these can be constantly tracked and evaluated compared to what was approved.”

The scope and duration of GSK’s supposed illicit activity suggest these basic elements of an active compliance culture may not have been in place, at least in GSK China.  This also raises concerns about an activity that GSK does endorse – metrics of good corporate citizenship.  The company consistently scores at the top of the NGO Access to Medicines Index, which requires evidence of “proactivity in fighting corruption, including the extension of ethical marketing practices to all sales agents, local distributors and contractors.”  The rub is don’t expect any public flogging of GSK from here to make much difference – the relationship between big Pharma and “watchdog” NGOs is flawed, because it is mutually reinforcing.

What this discussion says to us is this: if that proverbial defining moment is at hand, then the initiative has to be seized – from the top, and simply because it is the right thing to do to protect the long-term interests of shareholders, patients and the public reputation that matters in a world where access to medicines now qualifies as an individual right. We are at the point where good governance in pharma should be the competitive differentiator of success anywhere, but especially in emerging markets.