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Motives and Risks of

Multinational Pharmaceutical
Companies Bribing in China

Group 97
Claire, Li Sichen & Iris, Zhang Yahan

Contents
01

Introduction

02

Motives

03

Risks

04

Limitations and Outlook

Introduction
Significance and
Objectives

01

Backgrounds

In 2013, GlaxoSmithKline (GSK) accused of medical


bribery in China, fined 3billion RMB
Exposure of foreign medical companies bribery scandals
in China
China has become the high incidence area of foreign
medical companies bribery

Sell our medicine,


and I ll pay you a
significant
commission

50% - Public
Relationship Cost
30% Circulation Cost
The more
expensive
medicine I
prescribe, the
more commission
I can earn.

20% Ex-factory
Cost

Motives that
Trigger MNCs to
bribe in China

02
Legislative
Factors

Legislative Factors
Blurred
definition

Slight
Punishment

RMB 3billion

0.04% of 2013 net profit

USD 3billion

25.6% of 2012 net profit

02

Institutional Factors - Comparative Study

02

Compensating medical system by drug selling

.
s
v

Division of medical treatment and drug sales


1985

02

Compensating medical system by drug selling

.
s
v

Division of medical treatment and drug sales


1985

18th Century

15% Mark-up

Survive the post-war economic recession

No out-patient pharmacies

02

Compensating medical system by drug selling

.
s
v

Division of medical treatment and drug sales

5%
42%

58%
95%

Improving public welfare Driving economic benefits

02

Inciting bribery due to low-paying

.
s
v

Nourishing honesty with high salary

02

Inciting bribery due to low-paying

.
s
v

Nourishing honesty with high salary


Doctors Salary

300000

Base Salary

225000
150000
75000
0

Surgeon

Anesthetist

Dentist

Surgeon

Anesthetist

Dentist

02

Inciting bribery due to low-paying

.
s
v

Nourishing honesty with high salary

1%

99%

5%

95%

02

Predominance of public hospital

.
s
v

Dual Track of public and private hospitals

15%
Dominated the medical
resource
Few Choices
Increase
hospitals
bargaining power

85%
Public Hospitals

15%
85%
Private Clinics

The dual track system enables patients to


choose freely

Risks of MNCs
Bribing in China

03

Risks of MNCs Bribing in China

03

Direct Economic Loss from Penalties

Penalties for multinational pharmaceutical companies bribery in China


Year

Company

Country Involved

Penalty

Sales Revenue of
Corresponding Year

Penalty % of
Revenue

2016

Novartis

China

$25 million

$49,414 million

0.05%

2016

SciClone
Pharmaceuticals

China

$12 million

$157 million

7.64%

2015

Bristol-Myers
Squibb

China

$14 million

$16,560 million

0.08%

2015

Mead Johnson
Nutrition

China

$12 million

$5,412 million

0.22%

2013

GSK

China

$490 million

$34,193 million

1.43%

2012

Eli Lilly and


Company

Russia, Brazil,
China, and Poland

$29 million

$22,600 million

0.13%

2012

Pfizer

Bulgaria, China,
Croatia, Czech
Republic, Italy,
Kazakhstan,
Russia, and Serbia

$45 million

$54,660 million

0.08%

Average

1.38%

03

Risks of MNCs Bribing in China

03

Shrink of Market Value

$200 billion

$100 billion

10 Companies
15 Bribery Scandals

03

Shrink of Market Value

$200 billion

$100 billion

Average Stock Price Drop: -1.35%


Average Market Value Loss: -1,800 million USD

03

Risks of MNCs Bribing in China

03

Risks from Governments Attitude - Event Study


Treats foreign and domestic firms equally?
Any bias?
Any predetermined

Anonymous report,
Media exposure,
tendency?
Police investigation,
Criminal punishment

Event Study post-incidence effects on stock prices

Bribery scandals: 15 foreign, 3 domestic


Corrupt Companies

Domestic Medical Companies Other Foreign Medical Companies

10 multinational
medical companies
with business in China

Chinese Drug and Biology Index


(100 domestic firms)

Revenue weighted stock price change


of the other 9 MNCs

03

Hypothesis: when bribery scandals broke out

Corrupt Companies
10 multinational
medical companies
with business in China

Drop Reputation damaged

Domestic Medical Companies


Chinese Drug and Biology Index
(100 domestic firms)

Drop scandals tend to affect investors


confidence and outlook of the entire industry

Other Foreign Medical Companies


Revenue weighted stock price change
of the other 9 MNCs

Drop

03

When Foreign Medical Companies Bribe

Corrupt Companies
10 multinational
medical companies
with business in China

11 out of 15 dropped
Average -0.84%
4 exceptions: 3 of them are anonymous reports

Domestic Medical Companies


Chinese Drug and Biology Index
(100 domestic firms)

12 out of 15 increased
Average 1.28%
3 exceptions: 2 of them are anonymous reports

Other Foreign Medical Companies


Revenue weighted stock price change
of the other 9 MNCs

7 increased, 8 decreased
No specific patterns found

03

When Domestic Medical Companies Bribe

Corrupt Companies
10 multinational
medical companies
with business in China

3 out of 3 dropped
Average -7.65%

Domestic Medical Companies


Chinese Drug and Biology Index
(100 domestic firms)

3 out of 3 dropped
Average -0.46%

Other Foreign Medical Companies


Revenue weighted stock price change
of the other 9 MNCs

3 out of 3 increased
Average 0.22%

03

Interesting Facts
When domestic companies scandals broke out,
the domestic index decreased.

When foreign companies scandals broke out,


the domestic index increased.

03

Implications
Foreign and domestic companies are not treated
equally, in terms of medical corruption.
Government may have taken some actions to
protect domestic firms from being impacted.
Alternatively, government may encourage media
to expose foreign companies bribery cases.

Limitations and
Outlook

04

Limitations and Outlook


Limited resources of information
Since government will be involved in
this analysis, some information can be
sealed and remain confidential to the
public.

Limitations

Various Factors
Not able to eliminate all other various
factors may contribute to the stock
price change

04

Limitations and Outlook

Outlook

To study the followup actions of Chinese


health care reform
2016-2020

THANK YOU
Group 97