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Bribery scandals sap Lilly’s China growth

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Eli Lilly and Co. has been counting on torrid growth in China to help offset losses from patent expirations in other markets, but slower growth in the Chinese economy and bribery allegations against Lilly and two other drugmakers have hampered Lilly’s growth there.

The Indianapolis-based drugmaker reported Oct. 23 that its Chinese sales grew 11 percent—down from 14 percent in the first half of the year and a big drop from the 24-percent growth Lilly posted there last year.

Some of that decline is due to a general slowing in the Chinese economy. Gross domestic product grew 7.8 percent in China last year, its lowest level in 13 years, and has been slowing even more this year. Economists polled by Reuters expect growth in China this year of 7.6 percent.

“We saw really two dynamics playing out in China at the moment. One is just the overall slowdown in economic growth in China,” Lilly Chief Financial Officer Derica Rice told analysts during an Oct. 23 conference call. “And the second factor has been the impact of some of the current compliance discussions that are going on in the China marketplace here in the late second and third quarter.”

Those “compliance discussions” stem from three bribery scandals that emerged in China in the middle of the year.

The biggest case involves London-based GlaxoSmithKline plc, whose employees allegedly paid $490 million for spurious travel expenses and traded sexual favors to boost sales among Chinese health care organizations. Chinese authorities unveiled their allegations against GlaxoSmithKline in July, when they also detained four Glaxo employees.

In early August, Paris-based Sanofi-Aventis SA was alleged by a whistleblower to have paid about $280,000 in bribes to 503 doctors in the country.

Two weeks later, a Chinese newspaper reported that Lilly employees gave at least $4.9 million in kickbacks to Chinese doctors to prescribe diabetes drugs in Shanghai and the eastern province of Shanghai. The 21st Century Business Herald based its report on what it called a former senior manager of Lilly, which it referred to by a pseudonym.

Lilly officials said they were “deeply concerned” about the allegations and were investigating them.

Lilly told investors last week that the situation was worst in August, but appeared to improve in September.

“Some physicians seemed to be distancing themselves from MNCs [foreign drugmakers] and showing some reluctance to see MNC [sales] reps in August, which contributed to a challenging August, but September was better,” Lilly officials said in a statement.

Connecticut-based market research firm IMS Health reported that drug sales in China rose 16.8 percent from January through July, but the pace of growth slowed to 8.5 percent in August, according to data provided by Lilly. IMS has yet to release Chinese sales data for September.

Growth in China is critical for Lilly, because its best-selling drug Cymbalta will lose its U.S. patent in December, allowing cheaper generic versions to steal about three-quarters of its more than $5 billion in annual sales.

China provided Lilly more than $500 million in revenue last year—and Lilly’s China sales had doubled over the previous three years.

Rice, Lilly’s CFO, said he expects the sales to rebound from the bribery scandals, although he’s not sure when. Slower growth in China’s economy will be an ongoing challenge, Lilly officials said, but they still expect sales growth to remain in the “high-single-digit” range.

“Like in many other geographies, we have our challenges in China,” said Jacques Tapiero, the outgoing president of Lilly’s emerging-markets business, during an Oct. 3 presentation to investors and analysts. “There will be ups and downs, but the long-term trajectory is very clear and remains very attractive. We remain very committed to China and are fully focused on implementing our plans with high integrity.”

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