The detention of several AstraZeneca employees and eventually the company’s China president Leon Wang unsettled investors, fueling fears of a crackdown similar to the GSK scandal 10 years ago.
Two parallel investigations are looking into AstraZeneca’s practices in China. An insurance fraud case originally publicized by the Chinese government in early 2022 centers around allegations of fabricated tumor test results to increase the number of eligible patients—and hence sales—for AZ’s EGFR lung cancer drug Tagrisso. Over the years, an increasing number of employees at AZ and its diagnostic partners have been implicated in the case.
The second and more recent probe involves alleged smuggling of unapproved drugs—the Daiichi-partnered HER2 therapy Enhertu and the cancer immunotherapy Imjudo—from Hong Kong to mainland China. AZ’s Wang was arrested by police in the city of Shenzhen on Oct. 30 over alleged smuggling of goods, The Paper reports (Chinese) on Dec. 23.
Because the fake diagnostic scheme was identified by AZ from its internal investigation and voluntarily brought to the authorities, the company will presumably have the benefit of the doubt in that situation, Helen Chen, co-head for healthcare and a Greater China managing partner of L.E.K. Consulting, said in an email interview with Fierce Pharma.
The case has been dragging on for about three years without implicating AZ as a company.
As for the drug smuggling case, if Wang were to be found guilty, “given his seniority and how much he’s represented AZ, it might as well be the company,” Chen said.
In its recent investor updates, AZ has stressed that the probe has remained at the individual employee level but that it would cooperate with authorities if approached.
One analyst who’s been following the Chinese biopharma market suggested that neither of those allegations would cause too much damage for the company. The analyst requested anonymity to discuss freely sensitive political topics.
Although detailed dollar amounts in the smuggling case are unknown, the analyst argued that it couldn’t be too much because such illegal importations from Hong Kong to the mainland are only feasible using suitcases, not shiploads or truckloads.
Instead, it’s a potential anti-corruption component that raised a red flag for the analyst. Besides the police, China’s National Supervisory Commission, a powerful anti-corruption agency, also got involved in Wang’s case, the local news outlet Yicai reported in November, citing a person familiar with the matter.
Since 2023, China has amped up its sweeping anti-corruption campaign targeting hospitals and the pharmaceutical industry. The punishment could be harsh if Wang’s case involved senior government officials, the analyst suggested.
Implications for AZ and foreign drugmakers
As the two probes and the related uncertainties involved have done a number on AZ’s stock price, Chen expects AZ’s China operations to temporarily slow down.
“If nothing else, just the self-monitoring and water cooler time will reduce the productivity,” Chen said.
The above-mentioned analyst figured that AZ would reemerge from the probes largely unscathed. A hint could be drawn from China’s inclusion of Enhertu in its updated national reimbursement drug list despite the ongoing investigation. Nevertheless, the analyst expects the British pharma will be less aggressive with its expansion efforts in China.
In another sign that AZ might be let off the hook with a slap on the wrist rather than a full-on clamp-down, AstraZeneca CEO Pascal Soriot had a virtual meeting with Beijing Mayor Yong Yin on Dec. 19. During the call, Yin laid out Beijing’s resources and government policies supporting the biopharma industry, calling on AZ to expand its R&D investments and collaborations in China’s capital, according to Party-run Beijing Daily (Chinese). AZ’s China headquarters are based in Shanghai, with its innovation center and manufacturing facilities built near the city.
L.E.K.’s Chen doubts AZ’s experience will impact large pharma companies’ overall strategies in China.
“Those who are invested in China and are aware of the pressures will be reminded of the places where one can be tripped,” she said. “Those who are concerned about operating in China and was already on the fence will likely not move forward.”
Even without AZ’s episode, large multinational pharma companies have been resetting their expectations of China for years now, Macquarie Capital analyst Tony Ren observed. For example, Merck & Co. and GSK have lately been recalibrating sales estimates for their major vaccines in China. Some companies such as Pfizer have assigned commercialization duties of certain drugs in China over to local players, while others such as UCB have offloaded Chinese assets.
“I think most large [multinational corporations] will probably just treat China as an almost quasi-independent unit,” Ren said in an interview with Fierce Pharma.
Last year, Financial Times reported that AZ made a contingency plan to potentially separate its China business to protect the larger group from increased geopolitical frictions. For now, there’s no sign that AZ would execute that plan.
“We remain committed to our presence in China, and we will continue to invest in the country to support the discovery and the delivery of our life-changing medicines,” Soriot said during the company’s third-quarter earnings call in November.
Lessons from the missteps
The latest incidents serve as “a good reminder that constant vigilance is required, and internal checks and balances should always be in place,” Chen said.
AZ has had a compliance monitoring system in place, which apparently failed to catch the misbehaviors. Soriot blamed the oversight on the perpetrators’ usage of personal channels to dodge the company’s internal surveillance.
Trying to plug the loopholes, AZ has recently implemented compliance measures that go beyond its own systems, Soriot said.
AZ has planted a compliance officer at each sales region with the hope that they can catch any potential misconduct that evades internal policing. The company is also going to rotate regional sales directors so they don’t get too cozy with one environment, the CEO added.
Ethical issues such as corruption and dubious marketing practices are structural for the healthcare sector, ODDO BHF analyst Charlotte Vaisse pointed out in a note on AZ in November.
“[M]anagement of the compliance of employees and commercial partners and dedicated local training programs are vital,” Vaisse wrote. “In addition, effective whistleblower mechanisms, transparent follow-up of suspicious incidents and a code of conduct (available in several languages) are essential for effective ethical governance and therefore help reduce reputational risk.”
In AZ’s case, Vaisse suggested that the British pharma appoint a person specifically in charge of ethics and compliance. At AZ, chief compliance officer is one of three hats worn by Jeff Pott, in addition to chief human resources officer and general counsel.
On that point, AZ could take a page from Novartis. Reeling from a series of scandals in different parts of the world, including a questionable $1.2 million payment to then-President Donald Trump’s personal lawyer Michael Cohen, Novartis in 2018 elevated the chief ethics, risk and compliance officer position to its executive committee. That position has been held by Kalus Moosmayer, Ph.D., since 2018, separate from the Swiss pharma’s chief legal officer post.
Besides compliance measures, Macquarie’s Ren has drawn one more lesson for foreign pharmas.
“It’s probably just being realistic about what you can accomplish in China,” he said.
AZ has been the largest multinational drugmaker in China by sales for years. While other global pharma companies historically booked single-digit percentages of their global sales in China, AZ’s China business has represented more than 20% of its overall revenue base. Even at the top, AZ recorded an enviable 35% sales growth from China year over year in 2019.
In hindsight, pressure from the company’s higher-ups to keep outperforming potentially distorted the behavior of local salespeople.
To continue reading this article please go to Fierce Pharma .