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Corruption allegations may damage China health care industry
China's growing middle class is demanding better access to hospitals and modern drugs, turning health care into a boom industry.

Jim Middleton speaks with Benjamin Shobert, managing director of Rubicon Strategy Group and a member of the National Committee on US-China Relations.
JIM MIDDLETON, PRESENTER: Benjamin Shobert is the founder and managing director of Rubicon Strategy Group, an adviser to American and European companies entering emerging markets.

He's also is a member of the National Committee on US-China Relations, a government-supported non-profit organisation.

Benjamin Shobert, welcome to the program.


JIM MIDDLETON: The apology from GlaxoSmithKline, will it make any difference to the way China treats the company do you think?

BENJAMIN SHOBERT: I think it was a necessary face saving move. The government was going to anticipate this sort of acknowledgement of wrong doing on the part of the GSK executives. But I don't think when push comes to shove and it's time for final commercial or criminal liabilities to be assigned that this is going to make much of a difference.

JIM MIDDLETON: Do you buy the company line that the corruption was confined to just four of its Chinese executives, especially given the huge amount of money, close to $0.5 billion, that was involved in this scandal?

BENJAMIN SHOBERT: I think you're right on the amount of money would not that doesn't seem to make a whole lot of sense. And more to the point there's just systemic corruption problems in China's health care system, specifically in the pharmaceutical, medical device and diagnostic systems. And this is a common problem, it's one of the more frequent issues that executives in multinational firms worry about.

And so I don't think it's likely that the fault only lies with these four executives.

JIM MIDDLETON: What about the fact that this problem may not be confined to GSK? Chinese investigators have also raided the offices of a Belgian drug company, UCB, and Merck and Navatas are also under investigation apparently over allegations of price setting.

BENJAMIN SHOBERT: Again, we know that there are fundamental problem specific to corruption in the pharmaceutical sector. So we know - if GSK has been found guilty of this we know that these practices proliferate in the industry. I think one of the questions that everyone in the sector is looking to and is hopeful, is that the local government authorities don't focus their ire purely on the foreign companies. We want to see this ultimately turn towards the direction of the domestic pharmaceutical companies as well.

Their practices are equally bad, in many cases much, much worse. And so I think one of the questions that multinational pharmaceutical firms in particular have, is will the government ultimately pivot away from its focus right now, which has been primarily companies, and start to turn some of its investigative attention to domestic players.

JIM MIDDLETON: And on that point, Do you think they will? And do you believe this campaign against GSK is an extension of the war on corruption Xi Jinping has been waging since becoming party boss late last year?

BENJAMIN SHOBERT: Well I'll start with the first question that you're asking. We know that the NDRC (National Development and Reform Committee) and the SFDA (State Food and Drug Administration), which are two of the regular industry bodies in China that have oversight on this issue, we know that they have already announced 60 price fixing improper marketing, improper sales techniques. We know they've already instigated about 60 reviews, that already there's a blend of domestic and foreign companies. So I think there is good reason to be hopeful that international companies are not going to be the sole focus of this investigative effort.

The second question you're asking relates to whether this is an extension of Xi Jinping's anti corruption practice. I think we can say yes, but I think it's also an alignment between Xi Jinping's anti corruption efforts and also the enormous amount of money the health care government excuse me the Chinese government is putting into the health care system.

Since 2009 in particular, as you know, the country's made a significant effort to expands its coverage of national insurance And we know that it's putting enormous amount of money into expanding the amount that goes into paying for drugs for diagnostics. And one of their concerns is that a lot of that money is going to stick in the pockets of the doctors, hospital administrators, and not make its way to the people.

So it's a natural extension of the anti corruption program on the part of Xi Jinping, but I don't think on its own right explains it fully.

JIM MIDDLETON: What about this then: China is now a massive health care market, worth something like $350 billion. Are the Chinese authorities also trying to put pressure on the foreign pharmaceutical companies over the amount of money they charge for the drugs they sell to China?

BENJAMIN SHOBERT: Of course. I mean we've already seen in the last week one of the GSK executives come out and acknowledge that a significant part of these bribes actually obviously inflated costs on drugs. The number that he threw out was 30 per cent. So we know that there is - there's a pass through effect, that's created any time you have this kind of systemic corruption at every level of how health care and pharmaceutical are delivered in the Chinese market place.

So I think it's safe to say that the China's government expects one of the outcomes to be much more responsive prices on the part of multinationals. Again, I don't think that's the single best explanation. I think what we are hoping for is ultimately what you'll see is just more transparency in general, both in terms of prices that are established by individual companies, and also the reimbursement practices of the central government.

JIM MIDDLETON: Benjamin Shobert, thank you very much indeed.

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