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The GSK Scandal: When Questionable Global Practices Met Imperfect Institutions in Emerging Markets  
Product Ref: 14/546C Company: GlaxoSmithKline Inc.

Product Type: Case Industry: Pharmaceuticals & Biotechnology

Related Product(s): Teaching Note
Authors: Zhigang Tao   W. H. Lo
China・s healthcare reforms in the 1980s left the country・s hospitals under-subsidized and its medical officials underpaid. Hospitals relied on the market or on profits generated from the provision of medical services to cover the funding gap, while doctors became kickback seekers in order to make up for their low rates. In traditional markets, global pharmaceutical companies (:pharm companies;) are no strangers to wooing hospitals and doctors to favor prescriptions of their drugs. These kinds of questionable :marketing; practices were taken to the next level in the China market. Streams of financial flows, legal or not, from pharm companies to hospitals and doctors to win their favor in buying and prescribing their drugs became a structurally embedded problem of the country・s healthcare system.

The Chinese government introduced a new round of reform in 2009. While the reform represented opportunities for a vibrant and growing market for pharm companies, with the government promising to spend millions more on healthcare, the government・s action to wipe out bribery and other kickback-seeking behaviors of the industry left many industry players perplexed.

The first to take the heat was GlaxoSmithKline Inc. (:GSK;), a large British pharm company, which has been active in the China market since 1984. In July 2013, the Chinese government launched an investigation of GSK・s Chinese operations, which were allegedly engaged in bribery that lured hospital doctors and administrators to buy GSK drugs. For many international pharm companies in the China market, this was a wake-up call for them to consider how they should continue their presence in China. The alleged practice of bribery is an industry open secret common to pharm companies. Is this investigation an indication that the Chinese government is targeting multinationals in favor of local industry players? In a regulated industry in the market economy with Chinese characteristics, international pharm companies like GSK find themselves facing a stringent regulated environment that has become more difficult to navigate than before. Despite high-voltage growth rates in recent years, the industry only has a bare-boned distributions infrastructure, while it is filled with patient-trying administrative hurdles, has price restrictions on an expanded list of drugs, and offers weak institutional protection for companies・ intellectual property. Will long-term investment in the country pay off? Should GSK continue its China business? Should it change its strategy in China?
Functional Area : Strategy & General Management

Learning Objective: E To understand the importance of government・s visible hand in the market economy with Chinese characteristics by using the pharmaceutical industry in China as an example.
E To understand to what extent the China pharmaceutical market is attractive to global pharm companies.
E To exercise strategic thinking in identifying options available for GSK in China
Length: 43 pages Country: China (People's Rep. of)

Pub. Year: 2014 Level of Difficulty: 2
This product type is available in the following language(s):      English
Related Information: N/A
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