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Drugmakers fear short-term 'turmoil' as China probes widen

A flag (L) bearing the logo of GlaxoSmithKline (GSK) flutters next to a Chinese national flag outside a GlaxoSmithKline office building in S
A flag (L) bearing the logo of GlaxoSmithKline (GSK) flutters next to a Chinese national flag outside a GlaxoSmithKline office building in S

By Ben Hirschler and Elena Berton

LONDON/PARIS (Reuters) - Chinese authorities visited a regional office of French drugmaker Sanofi this week in the latest sign of a widening investigation into Western drugmakers.

Eli Lilly said it had also been visited by officials in the same city of Shenyang as part of a "routine" probe which had started earlier this year, while the CEO of AstraZeneca, which has a sales executive in detention in Shanghai, warned of short-term "turmoil" in the sector.

The latest developments suggest a series of probes into over-pricing and alleged bribery in the industry may have a broad impact, in a market that has been a particular bright spot for Western pharmaceuticals who face slowing sales at home.

"In the short term, there could be some ups and downs because this issue will create turmoil. It may well be that the industry experiences more intense price revisions," AstraZeneca CEO Pascal Soriot told Reuters on Thursday.

"But even if this happens, in the mid- to long-term China is a growing market - there is no doubt about that in my mind," Soriot added, stressing his company had no plans to cut back investment in the country.

Chinese police have detained four Chinese executives of GlaxoSmithKline (GSK) and questioned at least 18 other staff amid allegations the drugmaker funneled up to 3 billion yuan ($489 million) to travel agencies to facilitate bribes to doctors and officials.

At the same time, the powerful National Development and Reform Commission is examining pricing by 60 local and international pharmaceutical companies.

Sanofi said its office in Shenyang - one of 11 regional offices in China - had been visited by officials from the State Administration for Industry and Commerce (SAIC) on July 29.

"We are not really aware of the purpose of the visit, we are working with SAIC," CEO Chris Viehbacher told reporters on Thursday as he presented the company's second-quarter results.

Viehbacher added that the French group's local head office in Shanghai had not been contacted by Chinese authorities.

A spokeswoman for Eli Lilly said SAIC officials had also visited its office in Shenyang, adding that the visit was a regular business inspection and not related to the GSK case, which is being handled by the Ministry of Public Security.

SAIC is one of China's anti-trust regulators in charge of market supervision, which also looks into low-level bribery cases.

COMPLIANCE SCRAMBLE

AstraZeneca and Belgian drugmaker UCB have also been visited recently by Chinese authorities, but it remains unclear if or how the cases are related.

AstraZeneca's Soriot said one sales representative in Shanghai was continuing to be detained by police, although two other employees who were questioned were quickly released. Local police have told the company that the case is an "individual" investigation and not linked to the GSK scandal.

Big drugmakers have been scrambling to ensure their compliance systems are up to scratch in the wake of the GSK allegations.

Soriot, speaking after presenting quarterly results, said his team had "double- and triple-checked that everything is compliant" and he was confident the firm's internal systems to prevent bribery and corruption were robust.

China is an especially important market for AstraZeneca, since it has a long-standing presence in the country and punches above its weight in terms of market share. It enjoys strong sales of medicines like Nexium for controlling stomach acid, and Symbicort for asthma and chronic lung disease.

AstraZeneca grew Chinese sales by more than fifth to $431 million in the second quarter of 2013 and China represents 7 percent of the group's total revenue. China's contribution to GSK sales, by contrast, is just over 3 percent.

A promise last week by GSK to make its drugs more affordable in China in the wake of the bribery scandal is seen by many analysts as a lever for Chinese authorities to start pushing back harder on the cost of Western medicines.

One board member of a Western drugmaker not involved in the incidents reported to date said this could lead to some of the more bullish estimates for Chinese sales to revised down, although it would remain a major growth market.

Viehbacher said it was premature to say what repercussions the scandal would have on Sanofi's business in China.

"We are examining the issue closely and we are examining our business in China, but I think it's too early to draw any conclusions," he told reporters during the quarterly results briefing.

(Additional reporting by Michael Martina in Beijing; Editing by David Holmes)

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