When Big Pharma thinks about China, it doesn't see a great wall -- it sees a great opportunity. After all, China is already the world's third-largest market for pharmaceuticals and seems poised to take the No. 2 spot away from Japan within the next couple of years. The tremendous potential of the market led my colleague Dan Carroll to predict a coming boom in China for Big Pharma.
There could be a few busts before the boom fully arrives, though. Chinese officials recently launched several investigations into the practices of major pharmaceutical companies. While the investigations are new, the alleged practices of wrongdoing go back several years. The future in China could be bright for Big Pharma, but the past reflects a somewhat checkered history.
China's Ministry of Public Security announced detailed allegations against GlaxoSmithKline (NYSE:GSK) in July. The drugmaker was accused of bribing doctors with money and "catering to their pleasures" to get them to prescribe more of its drugs.
Abbas Hussain, president of Glaxo's Europe, Japan, Emerging Markets & Asia Pacific business unit, acknowledged that some of the company's executives in China "appear to have acted outside of [the company's] processes and controls which breaches Chinese law." Hussain stated that Glaxo had "zero tolerance for any behavior of this nature."
The scandal also expanded to include Sanofi (NASDAQ:SNY) in early August. Xinhua, the Chinese state news agency, reported that investigations were under way related to allegations that the French drugmaker bribed more than 500 physicians in 2007. Similar to Glaxo, Sanofi stated publicly that it had "zero tolerance for any unethical practices."
On Aug. 1, Chinese authorities visited one of Novo Nordisk's (NYSE:NVO) facilities. According to Novo CFO Jesper Brandgaard, the company was asked to provide information regarding its Chinese operations. He stated that "whether this was a routine check or triggered by the [Glaxo] case reported recently in the media is not completely clear to us." Brandgaard added that Novo Nordisk hasn't been accused of any wrongdoing.
While these bribery scandals have grabbed the headlines over the summer, allegations of questionable behavior by Big Pharma in China aren't new. And the issues aren't just being pursued by Chinese authorities.
Last year, the U.S. Securities and Exchange Commission charged Pfizer (NYSE:PFE) with bribing doctors and other health care professionals in multiple countries, including China. According to the SEC, the misconduct by Pfizer's subsidiaries dated all the way back to 2001.
The U.S. Food and Drug Administration became concerned in 2012 with irregularities involving clinical trials of blood-thinner Eliquis conducted in China by Bristol-Myers Squibb (NYSE:BMY). FDA documents revealed allegations of altering records and attempting to hide serious adverse events at Chinese sites where Eliquis was tested.
These issues prompted a second analysis of data by Bristol and exclusion of questionable data by the FDA. The concerns weren't significant enough to impact ultimate approval for Eliquis, though.
Winning the game
The current Chinese scandals probably won't have any long-lasting effect on Big Pharma. Glaxo's stock is basically right where it was when the news broke about the bribery investigation. Sanofi shares are actually up a little from the beginning of the month.
According to nonprofit organization Public Citizen, as of September 2012, the pharmaceutical industry had paid over $30 billion in settlements with the U.S. federal government and states for various types of alleged misconduct. Big Pharma prospered tremendously during this period, even with those issues.
Large pharmaceutical firms have been -- and continue to be -- solid investments for the most part, although they might not always be the most solid corporate citizens. Several of the major drugmakers boast some of the best dividends around combined with good growth prospects, particularly in emerging countries. Despite its "Chinese checkered history," Big Pharma will likely move past current and past problems to win big in the world's most populous nation.
Fool contributor Keith Speights has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.