In the romcom Love & Other Drugs, Jake Gyllenhaal, who plays a roguish sales rep, goes to great lengths to hawk a treatment for depression called Zoloft. Tactics include charming receptionists so he can wrangle openings to pitch to doctors, paying one doctor $1,000 for a chance to shadow him and dumping rival products stolen from a clinic’s medicine room.
According to the film’s director Edward Zwick, who adapted it from the memoir Hard Sell: The Evolution of a Viagra Salesman, the story was set in the 1990s when America’s FDA rules were eased on product promotion. “Suddenly the amount of money spent on drug advertising, and the amount made in sales, skyrocketed,” Zwick told the Wall Street Journal. Peddling products for off-label usage, as discussed in the movie, ended up in real life seeing Pfizer settle a $2.3 billion fraud case in 2009.
The potentially conflicted relationship between doctors and pharma firms worldwide is well documented. But it has received renewed attention in China lately, in the wake of a bribery lawsuit involving local pharma giant Jiangsu Hengrui Medicine.
Lei Lipei, a former director of the Anaesthesiology Department at Lishui Central Hospital in Zhejiang province, was found to have taken over Rmb6.7 million ($939,000) in kickbacks from a dozen pharmaceutical companies between 2014 and 2019. Hengrui, a leading oncology drug maker, was the biggest spender of all the accused, giving Lei Rmb2.7 million between late 2016 and early 2019 in a bid to encourage the adoption of five of its remedies at the hospital.
News portal NetEase noted that Hengrui has been found guilty in similar graft cases across the country. A lot of them spanned several years, with some stretching back to before it went public in Shanghai in 2000. The company has rarely received a material punishment, however.
In the latest instance, Lei was sentenced to seven years in prison and fined Rmb800,000, on top of having his illegal income seized. Hengrui was, again, acquitted.
In a statement on May 12 Hengrui explained: “The bribery was some personal acts of our subsidiary’s employees, which gravely violated our rules.” Noting that the incident reflected failings on the part of the company’s management, Hengrui said it had rectified the situation by dismissing the personnel related to the case, and transferring the head of the subsidiary to another post.
To prove that Hengrui itself had not engaged in illicit activity at management level, it also provided a breakdown of sales expenses totalling Rmb8.5 billion for 2019. Of this, 88% was spent on what it termed “academic promotion”, meaning sponsorships of medical conferences, organisation of clinical trials and publication of academic research. Another 11% went towards business trips made by its salesforce of 14,686 people.
“Judging from past events, bribes by pharmaceutical companies are typically billed as travelling and accommodation expenses,” reckoned Sohu.com.
“Academic promotion is actually a sales channel built with ‘lavish spending’. It is a breeding ground for corruption,” noted TMT Post, another local news outlet.
The case comes at a time when the government is stepping up efforts to reduce drug prices. Their elevated levels, especially for cancer treatments, has angered patients in the healthcare system, as satirised in the local blockbuster movie Dying to Survive in 2018 (see WiC417).
Aside from making lower-priced generic drugs more available; streamlining the distribution chain; and including more products into its list of subsidised treatments (see WiC418), the government is cracking down on many of the incentives offered by pharma firms. The rationale is that many of these unstated marketing costs are passed on to the end user.
Last June the Ministry of Finance and the National Medical Security Administration, which runs the nation’s health insurance fund, kicked off an auditing process for 77 pharmaceutical companies, including Hengrui and the local units of global heavyweights Sanofi, Eli Lilly and Bristol-Myers Squibb.
The exercise, whose results are yet to be reported, is expected to reveal inconsistencies in the companies’ books, Chen Hao, a researcher at Wuhan’s Huazhong University of Science and Technology, told Caixin. He also believed the probe is designed to help the government assess whether drug reforms such as the “two-invoice system” (see WiC410) are working, and whether companies have found new ways to hide kickbacks to their clients.
Last year Shanghai Pharmaceuticals was the biggest spender on sales and marketing among the 324 drug makers listed on the A-share market, followed by Shanghai Fosun Pharmaceutical Group. Hengrui was third, with a sales-to-revenue ratio, at 36.6%. The absolute sum Hengrui spent on marketing was more than twice the expenses on research and development. That allocation of resources begs the question: is Hengrui is well-positioned to shift its focus from off-patent drugs to innovative therapies? Of course, a focus on innovative new treatments would require a bigger share of spending on R&D. That would align with the central government’s ambition for local firms to take the lead in biotechnology.
Currently Hengrui has six of its own (patented) innovative therapies in the market. However, it still draws nearly 90% of its income from sales of generics.
© ChinTell Ltd. All rights reserved.
Sponsored by HSBC.
The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.