Chinese corruption

China’s corruption crackdown rips through healthcare sector

Efforts to tackle bribery and fraud could have far-reaching impact on doctors, patients and
multinational drugmakers

Despite its slowing economy, China remains important for multinational pharmaceutical and medical equipment companies
© CFOTO/Sipa USA/Reuters

Sun Yu in Shanghai, Edward White in Seoul and Eleanor Olcott in Hong Kong
2 HOURS AGO

In late July, doctors at a Shanghai hospital were called into work at 6.30am for
an urgent meeting, expecting to be faced with a healthcare emergency.

Instead, they were met by management, telling them the hospital would in
September be placed under investigation by the Central Commission for
Discipline Inspection, the Chinese Communist party’s internal watchdog.

While the hospital remained open, “we are focused on reporting each other to
the authorities and conducting self-inspection; the CCDI will probably send an
inspection team to our hospital next month to decide who to arrest”, said one of
the hospital’s doctors, who asked not to be named.

Over the past few weeks, at least 176 hospital bosses have been detained as
President Xi Jinping’s administration has sought to stamp out bribery,
embezzlement and fraud across China’s healthcare sector.

In one example cited by state media, a hospital head in Heilongjiang province,

in China’s north-east, took multiple bribes from drugs salespeople, using a
in China’s north-east, took multiple bribes from drugs salespeople, using a
different phone number for each transaction, making deals on remote roads and
depositing cash in far-flung banks with the help of his relatives.

While the full extent of corruption in the sector is still becoming clear, doctors
and other healthcare professionals warn that the crackdown will have a far-
reaching impact on Chinese patients and companies, as well as on multinational
drugmakers and researchers.

Several chief executives of local drug companies have been detained and
pharmaceutical companies no longer have easy access to hospitals to market
their wares. The crackdown serves as a reminder to international investors —
whose fortunes have been decimated by previous shake-ups in the internet and
education industries — of how investments can quickly become vulnerable if a
sector is targeted by Beijing.

Despite the slowing economy, China remains an important market for

multinational pharmaceutical and medical equipment companies.
Pharmaceutical sales in China are forecast to grow to $264.5bn in 2026, up
from $211.6bn last year and marking an almost $100bn increase from 2020,
according to data from Fitch Solutions.
The anti-corruption campaign has dragged stocks in the sector sharply lower,
with the MSCI China Healthcare index down almost 10 per cent since late May,
while the benchmark CSI 300 index has been flat.
Since March, at least 12 applications for initial public offerings by Chinese
pharmaceutical companies have been dropped amid the intensifying regulatory
scrutiny, according to data from Wind, a Chinese markets information service.
“The crackdown is going to have a knock-on effect for at least six months,” said
one IPO banker in Shanghai.

Given that China represents a double-digit share of revenue for many

multinationals — 13 per cent for AstraZeneca and 10 per cent for Novo Nordisk
— Helen Chen, head of LEK Consulting’s healthcare practice in Shanghai, said
“any dampening of sales growth in China is something they will be actively
monitoring”.

Bruce Liu, who leads the life sciences division in China for Simon Kucher, a
consultancy, said in the short-term the crackdown might hit sector-wide sales in
China, but longer-term multinational pharmaceutical companies with higher
compliance standards could stand to benefit.

“It will benefit companies that are more science-driven and have a cleaner way
of doing promotion,” he said, adding a note of caution: “Right now, it is not
clear to the industry where the red line is, and the worst part is always the
uncertainty.”

Chen Long, co-founder of Beijing-based research company Plenum, said that

while anti-graft campaigns were not unusual in China, their scale could be
difficult to predict and, in this case, had taken investors by surprise.

While some companies and investors had been caught off guard by the
crackdown, Ryan Manuel, managing director of Bilby, a consultancy that
analyses Chinese government documents using artificial intelligence, said
the government had signalled a crackdown was looming in 2020 and 2021.

Some investors warn that no matter how justified, if the crackdown is

mishandled, it could serve to dampen private sector interest in an area that is
becoming increasingly critical for China, as rising demographic challenges
necessitate increased investment in healthcare.
necessitate increased investment in healthcare.

Sun Ningling, a prominent cardiologist at Peking University People’s Hospital,

warned in a social media post that the crackdown could hurt the advancement
of medical science in China as even corporate sponsorship of conferences comes
under scrutiny. Organisers have delayed or cancelled more than a dozen
conferences since the campaign began.

The investigations come amid alarm over rising medical fees in China, with per
capita medical costs having more than doubled in the seven years to 2021,
according to Wind data. This has added to Beijing’s concern about the financial
ties between drugmakers and health officials.

Low salaries add to pressure on doctors, said Jin Dong-yan, a virologist at the
University of Hong Kong. A working paper published in July by the National
Bureau of Economic Research showed medical doctors in the US made an
average of $350,000 a year. A survey of 2,226 Chinese doctors by YXJ, an
industry portal, last September found respondents made an average of
Rmb107,000 ($14,700) a year.

While cash payments are seen as too dangerous, given regulatory scrutiny, Mike
Wu, a surgical stapler maker in Shanghai, said medical suppliers were turning
to expensive dinners and gifts to curry favour. “Most hospital doctors and
executives think they are underpaid relative to their knowledge and experience.
So they take money where they can,” he said.

Xu Yucai, a former health official in Shaanxi province, said while there needed
to be “long-term, systematic solutions”, starting with improved oversight, the
latest corruption campaign had swept through the industry “like a hurricane”.

“The hospital executives and staff I know are all at a loss about what will happen
next. Everyone is scared,” Xu said.

Additional reporting by Hudson Lockett and Cheng Leng in Hong Kong

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