Asia’s Drug Makers Must Focus on Compliance as Aggressive Growth Targets Increase Risk of Fraud

New regulations, tighter policies and stronger enforcement in Asia Pacific have increased the risks of fraud in the life science industries and the cost of non-compliance or corruption. Employees in the region are also more conscious of their employers’ ethical record. The result is a need for better and sustainable compliance programs for companies operating across Asia Pacific.

“For life science companies, the biggest difference from general compliance is the frequent contact with doctors and some doctors who work at public hospitals are considered as government officials in countries like the U.S. and UK,” said Emmanuel Vignal, Asia-Pacific fraud investigation and dispute services life sciences leader at Ernst & Young (EY). “So compliance can trigger some fairly heavy things.”

EY produced a life sciences specific report from its Asia Pacific Fraud Survey 2015, which it launched earlier in 2015.

Issues of compliance have been in the spotlight in Asia Pacific in recent years, not least as a result of some high profile investigations in the pharmaceutical space. China, in particular, has tightened its regulations more than other countries.

“When it comes to compliance, China is really the hot spot for pharmaceutical and medical device companies,” Vignal told BioWorld Asia. “In countries like Thailand and Malaysia, a wider trend of fighting corruption is ongoing, but not specifically in the life sciences sector or to the extent we’re experiencing in China.”

China’s most-recent anti-corruption campaign started in mid-2013 with an emphasis on pharmaceuticals and medical devices industries. This has resulted in multinational companies reinforcing their compliance programs in the country.

The now infamous Glaxosmithkline plc China scandal is a perfect example of the country’s push for stronger enforcement of misconduct in the pharma space. The British pharma major ended up paying a $490 million fine after a court in China found it guilty of bribing doctors. The former head of GSK’s China business received a three-year suspended jail term and a deportation notice. (See BioWorld Today, Sept. 22, 2014.)

There are two sets of regulations dealing with what could be deemed suspected corruption payments in China that biotech companies should be particularly wary of. One is under the unfair competition legislation dealing with commercial bribery. Another involves bribery of officials, which is covered under criminal law.

A bribe to a doctor in China is generally treated as commercial bribery, but can be upgraded to a criminal offense if the doctor in question is part of the management team of a state hospital.

“The level of severity is different because of doctors are considered differently according to local legislation,” said Vignal.

When it comes to pharma fraud risk, sales departments bear the brunt. Pharmaceutical companies have large in-house sales forces. Multinational companies in China typically hire between 3,000 and 5,000 sales representatives on the ground.

“Many of the pharmaceutical companies I work with in China and South East Asia have crazy targets of growth and increasing revenue,” said Vignal. “But the demand is actually not big enough for everybody to achieve double-digit growth.”

Sales people might be tempted to manipulate revenue by moving products to temporary warehouse to reach revenue recognition or push the products they couldn’t digest to distributors. Under the pressure of quarterly earnings report, many public companies are even more concerned about the sales numbers they present to their investors.

“The implication for listed pharmaceutical companies is that their revenue is excessive so that [revenue manipulation] could happen,” said Vignal. “It is a side effect of sales representatives or regional sales director trying to achieve their own target.”

Toshiba Corp., of Tokyo, is suffering from the worst accounting scandal ever this year in its 140-year history. The company has been overstating its profits by $2 billion over the past seven years. The company’s stock plunged terribly when the scandal was revealed and it’s expecting to lose $4.53 billion this year to March. The company decided to sell its medical system and services business this week.

Another type of fraud pharmaceutical companies tend to be involved in is improper payment to transfer money to doctors or health care practitioners.
“Improper payment to buyers seems to be a reoccurring issue for pharmaceutical companies,” said Vignal. “We’ve seen this in proper forms like entertainment; as the amount gets bigger, third parties such as travel agencies and event organizers will channel the payment.”

“It could also be in the form of donation or sponsorship but more traditionally it’s through the travel agencies,” said Vignal. “And we’ve seen it in China itself as well as many jurisdictions across APAC.”

China and many of the economies in South East Asia are experiencing slower growth which has affected the pharma industry. This has put a lot of pressure on sales representatives, so they are being pushed to come up with other methods to boost their sales numbers or to fulfill their sales target.

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