Medical anti-corruption storm continues to deepen, 2024 executives violations occur frequently. According to the Huaxia Times report, as of December 15 this year, there have been 47 listed companies announced that 51 directors, supervisors and executives have been implemented retention, the number of record high, nearly doubled compared to the 2023 year. Among the retained executives, more than half of them are the actual controllers or chairmen of the enterprises, among which a number of executives of listed companies in the field of pharmaceuticals have been retained, involving a number of subsectors such as medical consumables, pharmacy chains, traditional Chinese medicine and pharmaceuticals, chemical pharmaceuticals and so on.
This round of anti-corruption storm began in May 2023, the National Health Commission, in conjunction with 14 departments, issued the “Points for Correcting Unconscionable Practices in the Field of Pharmaceutical Purchase and Sales and in Medical Services in 2023”, which focuses on the rectification of corruption in the field of pharmaceuticals.2024 In 2024, the executives of a number of listed companies, such as Yangpu Medical, the common people, Dali Pharmaceuticals, and TIANXIN Pharmaceuticals, were placed on probation, which triggered widespread concern in the industry. Among them, Deng, the chairman of Yangpu Medical, has been retained twice, showing the regulator's zero-tolerance attitude toward irregularities in the medical field.
This unprecedented regulatory storm has not only had a direct impact on the pharmaceutical industry, but also fundamentally reshaped the industry's development model.2024 The first half of the financial report shows that the A-share 471 pharmaceutical concept companies' sales expenses have significantly contracted, and more than half of the companies' sales expense ratio declined year-on-year, marking the industry is bidding farewell to the growth model of excessive marketing.
The lack of compliance and governance has exposed the ESG shortcomings of pharmaceutical companies. In this profound industry change, the medical anti-corruption is not only a simple governance action, but also an important opportunity to promote the benign development of the industry. From the perspective of ESG, this storm is reshaping the development logic of the pharmaceutical industry, pushing enterprises to make all-round changes in corporate governance, social responsibility and sustainable development.
Corporate Governance Transformation Looms
The medical anti-corruption storm has exposed deep-rooted problems in industry governance. Past cases have shown that both Zhou, the real controller of Weining Health, who was suspected of taking bribes, and Ke, the real controller of Dashenlin, who was investigated and punished, reflect serious loopholes in the compliance and governance of pharmaceutical companies. Especially in terms of information disclosure, most of the investigated and sanctioned enterprises on the executive violation of the secret, only to “personal reasons” excuse, highlighting the opacity of corporate governance.
Such governance deficiencies not only jeopardize the interests of investors, but also fundamentally affect the long-term development prospects of enterprises. As in the case of Wohua Pharmaceuticals, before the chairman of the board of directors, Mr. Zhao, was investigated, the company was subjected to regulatory inquiries due to abnormal sales expenses, the sales expense rate far exceeded the industry average, and the composition of the expenses lacked a reasonable explanation. This governance risk eventually evolved into a serious compliance crisis, resulting in a significant shrinkage of the company's market capitalization, restricted access to financing, and damage to its brand reputation.
Similar cases are not unique in the pharmaceutical industry, as there have been pharmaceutical companies that have lost important market development opportunities due to allegedly non-compliant transactions by the management, which led to the shelving of M&A programs and the stagnation of R&D projects. These cases remind us that deficiencies in corporate governance often have a knock-on effect on all levels of an organization, from day-to-day operations to strategic development.
Reconstructing social responsibility to return to public value
As an important part of people's livelihood, the medical industry's business behavior is directly related to public health. In recent years, with the frequent occurrence of cases of bribery by pharmaceutical representatives, the “sales with gold” has become a chaotic phenomenon, which not only pushes up the cost of medical care, but also jeopardizes the relationship between doctors and patients. The anti-corruption storm is actually pushing the industry to return to the essence of public service.
In the face of the new situation, some forward-looking leading enterprises have begun to actively transform. Instead of relying on the traditional marketing and promotion model, these enterprises have rebuilt their competitive advantages by establishing a sound compliance management system, restructuring their marketing system and investing more resources in R&D and innovation. Some companies have set up specialized compliance committees, introduced third-party monitoring mechanisms, and established transparent expense management systems to achieve full traceability of the marketing process. At the same time, these companies have also significantly increased their R&D investment, focusing on product innovation and service quality improvement.
Although this transformation may lead to slower sales growth and pressure on profits in the short term, it will help companies establish a more sustainable business model in the long run. Those enterprises that have taken the lead in completing the transition, in terms of product quality, brand reputation, market access and other aspects have begun to show the advantages for the industry as a whole to set a new benchmark for development.
Investors' focus shifts to corporate governance capabilities
Driven by the ESG investment concept, the valuation system of pharmaceutical companies is undergoing fundamental changes. Instead of focusing solely on short-term performance growth, investors are placing more emphasis on corporate governance, compliance and social responsibility performance.
This trend has been reflected in investment decisions in the capital market. Pharmaceutical companies with good ESG performance tend to receive higher market valuations and more stable institutional holdings. On the contrary, those with governance deficiencies face multiple challenges, and in addition to the direct risk of penalties, they will be disadvantaged in terms of bidding qualifications, market access, and supplier certification.
What's more, these companies often lose opportunities due to poor ESG ratings when seeking strategic cooperation and carrying out international layout. Some large pharmaceutical companies have been blocked in mergers and acquisitions and delayed in product registration due to corporate governance issues when expanding into overseas markets. This shows that ESG has become an important dimension for measuring corporate competitiveness in the context of globalization.
Editor's Notes:
Medical anti-corruption is not only a regulatory action, but also an important opportunity to promote ESG construction in the pharmaceutical industry. In recent years, the problems exposed by pharmaceutical companies in terms of corporate governance are thought-provoking. In particular, the shortcomings in non-transparent information disclosure and lack of internal control mechanisms have directly affected the sustainable development ability of enterprises. In the future, enterprises need to shift from simply pursuing performance growth to more comprehensive value creation, which includes establishing a sound compliance management system, enhancing transparency of information disclosure, and strengthening internal control mechanisms, as well as paying more attention to R&D innovation and social responsibility. Those companies that are able to complete the transformation under the ESG framework will be able to take an advantageous position in the new competitive landscape. This change, which began with the fight against corruption, will ultimately drive China's healthcare industry toward greater standardization, transparency and sustainability.
