Chinese Authorities Pay Roche A Visit To Ensure Ethical Business Practices

Chinese Authorities Pay Roche A Visit To Ensure Ethical Business Practices

Roche Holding was visited by Chinese authorities as the country’s officials ramp up pressure to ensure that international players in the pharmaceutical industry are running ethical businesses

By Aliya Kaleem on May 22, 2014 at 7:22 am EST

Roche Holding Ltd. (ADR) (RHHBY) is the latest pharmaceutical company to be scrutinized by Chinese authorities, who are investigating foreign businesses for possible economic crimes conducted in the country.

The Swiss drug maker confirmed that a unit of Chinese anti-trust regulators visited its Hangzhou operations in Eastern China yesterday. It further said that it would cooperate with the authorities as far as the investigations are concerned. Management did not say anything about the purpose of the visit.

Reason for the Investigation

This investigation comes after the recent case against GlaxoSmithKline plc (ADR) (GSK). The Chinese police claim that GlaxoSmithKline’s top executives forced their sales team to pay doctors and hospital employees to use GSK products. Investigators used GSK’s pricing policies to substantiate their claims that increased costs associated with bribery were eventually passed on to Chinese consumers. GSK-manufactured drugs in China are more expensive – sometimes almost seven times more expensive – than the drug maker’s products in other countries. Authorities believe that the increase in prices directly corresponds to the fact that the company’s operational costs in China are relatively higher due to corruption.

The Chinese authorities had earlier issued a warning, saying that the corruption charges against GlaxoSmithKline PLC (GSK) executives hold the potential to cause “irreparable damage” to the corporation’s operations outside of China. News of the Chinese authorities visiting Roche Holding’s operations in China has come a time when officials are looking into the sales practices of many players of the pharmaceutical industry in the country.

Roche was one of Shanghai Linjiang Travel Agency’s clients. The agency was questioned concurrently with GSK for possible involvement in bribery. Roche said in July last year that it had stopped working with the travel agency once claims of this illegal behavior were made public.

The Pharmaceutical Industry In China

Healthcare reform is a top priority of the Chinese government, which had previously identified the goals of cracking down on corruption and lowering the cost of healthcare, and drug prices in particular. In the last five years, the Chinese government has spent $180 billion in its attempt to provide basic healthcare to more than 90% of its citizens. In the last decade or so, drug-makers have ramped up investments in China, largely because rising incomes have made healthcare more affordable for much of the Chinese population.

What’s Next?

Roche Holdings, which continues to be a dominant player in the cancer therapeutics market, generated about 5% of its revenues from China in FY13, up 9/10ths of a percentage point year-over-year.

GSK’s sales were estimated to have dropped by nearly a third in the first four months after the company was implicated in the bribery scandal. GSK, which does not quantify its Chinese sales separately, did say in September 2013 that there would be “some impact to [its] performance in China,” without confirming whether GSK sales from China had indeed dropped.

It is likely that Roche Holding’s sales could suffer going forward if it is slapped with charges pertaining to unethical behavior in the country.

Sell-side Estimates

Four of the five analysts covering the stock have given it a Buy rating, and one recommends a Hold. The company’s shares are currently trading for $37.15, lower than the average per-share target price of $40.99.

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