Is Big Pharma Addicted To Fraud?

First, Chinese authorities announced they were investigating GlaxoSmithKline and other pharma companies for bribing doctors, hospitals and government officials to buy and prescribe their drugs. Glaxo is accused of using a Shanghai travel agency to funnel at least $489 million in bribes.

Then the New York Times revealed last week the alarming news that an internal Glaxo audit found serious problems with the way research was conducted at the company's Shanghai research and development center.

Last year Glaxo paid $3 billion to resolve civil and criminal allegations of, among other things, marketing widely used prescription drugs for unapproved treatments and using kickbacks to promote sales.

And in 2009, Glaxo paid $750 million to resolve civil and criminal charges that quality failures led to serious contamination of drug products at its manufacturing operations in Puerto Rico.

Glaxo is a leader in pharma fraud and wrongdoing, with other industry heavyweights close behind. Over the past decade, whistleblowers and government investigations in the US have exposed a never-ending series of problems by numerous pharma companies in all facets of the industry, starting with fraudulent “research” papers used to bolster marketing and continuing through to the manufacture of contaminated and defective products, the marketing of drugs for unapproved and life-threatening uses and the mispricing of prescription drugs.

But the combination of pharma's noncompliant corporate culture and the prevalence of corrupt business practices in China and other emerging economies could have a lethal impact on many more consumers as pharma shifts more research and development functions, manufacturing operations and marketing efforts to those growing markets.

In China, Glaxo allegedly used the travel agency to hand out inducements by claiming the payments were for travel and meeting expenses. Glaxo issued a statement by Abbas Hussain, Glaxo’s president international, that acknowledged some of its executives may have “acted outside of our processes and controls which breaches Chinese law.”

Chinese officials say they are investigating other foreign companies for similar charges. Merck & Co ., Roche Holding and Sanofi SA confirm they used the same travel agency as Glaxo, but they haven’t been accused of wrongdoing.

Meanwhile, AstraZeneca -- which previously reported that it is under investigation by the Securities and Exchange Commission and the Justice Department -- said last week that police in Shanghai questioned two company sales managers, but “we have no reason to believe it is related to the other investigations.”

If the bribery accusations are true, the pharma companies could face charges in the US for violating the US Foreign Corrupt Practices Act, an anti-bribery law, as well as charges by Chinese authorities. Last year, Pfizer paid $60.2 million and Eli Lilly & Co. paid $29.4 million to the US to settle allegations they had bribed government officials, including hospital administrators and government doctors, in China and other countries to approve and prescribe their products.

But having to deal with a new cop on the bribery beat – China – should scare all pharma companies and their employees who have engaged in bribery. Four Chinese-born senior executives in China were originally detained, and last week Chinese media reported that police have detained 18 more Glaxo employees and some medical personnel. A British consultant to Glaxo in China also reportedly is being held. Chinese authorities may hold all of them in custody as long as the police feels it’s necessary – putting additional pressure on Glaxo and other pharma companies to resolve this matter.

Though Big Pharma’s practices in China are grabbing headlines, not much about them is truly new. Those tactics – the use of payments disguised as speaking and consulting fees, luxury travel, sex and numerous other inducements to expand sales of prescription drugs -- are marketing techniques homegrown in the U.S.  They simply have been exported to emerging markets.

Now it’s China’s turn to express the same outrage that U.S. prosecutors did when faced with a recalcitrant industry that uses illegal inducements as a core business strategy for selling its prescription drugs.

“I need to remind foreign pharmaceutical companies that, because they occupy a leading position in the industry and reap huge amounts of commercial profits, they should also bear a great responsibility to society and the public,” Gao Feng, a Public Security Ministry official said at a July 15 briefing. “While we don’t expect them to set a moral example, we expect them to obey the law.”

That may be too much to expect from pharma, which has paid more than $30.2 billion in civil and criminal penalties to the US and state governments and continues to face more allegations of wrongdoing.

Big pharma’s woes in China underscore that the industry - despite huge penalties and a long string of public mea culpas – has a fraud habit that is just too profitable to kick. Finding a cure should be a top priority of regulators worldwide.