Who's putting the screws to Big Pharma in China?
Name: Zhang Mao
Title: Minister of the State Administration for Industry and Commerce
China's very public investigation into bribery accusations against GlaxoSmithKline ($GSK) and others upended the comfort Western drugmakers were starting to feel--and the earnings growth they were starting to expect--from this valuable market. It began with allegations from whistleblowers, but it gave authorities a foreign foil for public outrage over corruption, and a hammer with which to beat down drug prices. In China's opaque system, it is hard to know for sure who exactly put all the pieces together to take advantage of the situation, but the State Administration for Industry and Commerce (SAIC), has been identified as the main force behind the probe, and Zhang Mao is minister of the SAIC.
Zhang is an important party official who has steadily moved up in government and was a Secretary of the Ministry of Health when it crafted its healthcare reforms. The reforms are intended to make healthcare more uniformly available throughout the vast country. They also are supposed to help the government get a better grip on the price tag for doing that, which is estimated to reach $1 trillion by 2020. Drug costs will make up a big piece of that burden, and China has been taking the usual steps to rein those in, namely patent challenges and price controls. But scaring the bejeezus out of drugmakers with a criminal investigation seems to work too.
The mess began in July 2013 when whistleblowers alleged GlaxoSmithKline had used a $489 million slush fund pegged for travel to bribe officials. The whole thing played like a TV police drama, with GSK employees rounded up and detained, and some starring in state television interviews publicly airing their accusations about misdeeds by the company. GSK emerging markets chief Abbas Hussain jetted in to do damage control, offering up apologies to authorities. But he offered something more tangible as well--some compensatory price cuts. Since then, Sanofi ($SNY), Eli Lilly ($LLY) and Novartis ($NVS) have been dragged into the fray and others have had visits from investigators from the SAIC.
So what is the story on Zhang? According to the blogs China Business Focus and China Vitae, the 59-year-old Zhang has a master's degree in law and a doctorate in economics. He is a senior economist with strong political and government credentials. He joined the Communist Party of China in 1973 and is a member of the 18th CPC Central Committee. His resume includes serving as deputy director of the Beijing Municipal Foreign Economic Relations & Trade Commission and vice mayor of Beijing. But he has some some hands-on experience managing a business. One of his first positions was running the Beijing Glass General Factory.
From 2006 to 2013, Zhang was a deputy director of the NDRC, and served part of that time as Secretary of the Ministry of Health. It was a key position for understanding the pricing pressures of healthcare and influencing the country's effort to reform them. In 2013, he took over the top role at the SAIC, a government authority that shares business and economic oversight with the NDRC.
The fallout from the investigation is still being tallied, including repercussions outside of China. In GSK's third quarter, the drugmaker saw its sales in the country fall 61%. With sales in China accounting for only 4% of its total, the damage was not horrible, but emerging markets are an important growth opportunity as generic competition puts pressure on sales in the West. The probe also set in motion something that has the potential to be even more costly: It piqued the interest of U.S. investigators, who want to know if the company has run afoul of the U.S. Foreign Corrupt Practices Act (FCPA).
The situation seems to have settled down in China for now. Still, given the scope of the SAIC over trademarks, company registrations, and other assets, Zhang and his friends at the NDRC have the sway to make the lives of foreign drugmakers either comfy and secure or very uncomfortable. With healthcare reform a never-ending story, Western drugmakers will find many opportunities to negotiate their way into, or out of, one of those positions.
-- Eric Palmer (email | Twitter)
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