Can Pascal Soriot contain the China crisis at AstraZeneca?

As about £17 billion was being erased from the share price of AstraZeneca this week over fears of a widening investigation by the Chinese authorities, Sir Pascal Soriot was in the region seeking to continue business as usual.
The veteran chief executive, and architect of the FTSE 100 drugmaker’s rapid growth in Asia over the past 12 years, was in Singapore for a ground-breaking ceremony on a new plant.
Investing in the new facility “was an easy decision”, Soriot, 65, told assembled politicians and dignitaries as he thanked the government for a longstanding partnership.
• AstraZeneca says its China president is being held in custody
While Soriot has become accustomed to handling political leaders and regulators during AstraZeneca’s emerging markets expansion, he is now confronted with one of the most difficult crises of his time in charge.
A day after the FTSE 100 company’s shares fell more than 8 per cent on Tuesday on the back of state media reporting that dozens of senior executives in China had been implicated in an ongoing insurance fraud case, Aradhana Sarin, the chief financial officer, hosted a conference call with City and Wall Street analysts.
Attempting to dispel mounting speculation and reassure markets, the Cambridge-based company clarified to analysts and media that Leon Wang, its executive vice-president for international and its China president, had been detained in Shenzhen as part of an unknown investigation.
Separately, it said that about 100 former employees had been sentenced over a separate alleged medical insurance fraud investigation dating back three years, where patient test results were allegedly falsified to qualify patients for reimbursement for its blockbuster Tagrisso cancer drug. None of those charged, though, are said to be executives.
The Chinese authorities are also pursuing an investigation into the alleged illegal importation of unapproved medicines from Hong Kong into mainland China and the inappropriate collection of patient data. This relates to three other cancer drugs, Enhertu, Imjudo, and Imfinzi.
AstraZeneca is aware of two current and two former executives in China who are under investigation out of a total of about eight individuals. They include Eva Yin, who worked for AstraZeneca for more than 15 years and had been general manager of its China oncology business.
Although Sarin, 50, stressed AstraZeneca was not aware that it is being directly investigated, and reiterated the group’s ambitious $80 billion 2030 group revenue target, the shares had continued to weaken — down a quarter since September’s peak and at their lowest point since February. They steadied up with a rise of 1.8 per cent on Friday to just over £99 as Beijing unveiled $1.4 trillion of economic support for the economy.
The crisis has drawn comparisons with a major China bribery scandal that damaged GSK, Britain’s other big pharma company, a decade ago.
Soriot, who for years has shrugged off concerns about the risks of AstraZeneca’s rapid growth in China, is preparing to be questioned further on the investigations when it posts a third-quarter trading update on Tuesday, including on whether it was the wrong call not to have previously moved to break out and list its China business.
• AstraZeneca shares fall as report says China fraud inquiry has widened
Signs of trouble surfaced in early 2022 when Beijing’s National Healthcare Security Administration, which oversees China’s general health insurance plan and ­medical aid programmes, said some AstraZeneca staff had been arrested for allegedly scamming medical insurance firms by altering the genetic test results of cancer patients to obtain medical insurance funds.
The administration prompted Shenzhen to form a joint task force, involving health, police, and market regulatory authorities, to investigate. In collaboration with the Ministry of Public Security, it met executives from AstraZeneca China to “communicate the interim findings … and instructed AstraZeneca to rigorously adhere to legal standards, co-operate fully with authorities, and immediately implement internal checks to rectify any procedural gaps”.
Despite the emergence of the investigation and a broader anti-corruption investigation into the country’s healthcare sector, AstraZeneca has continued to invest billions of dollars in China for new facilities and acquisitions, as well as partnerships with local biotech companies.
In February, Shanghai was designated the group’s fifth global strategic hub and the following month Soriot, who has a home in Sydney, was in Beijing to attend the China Development Forum — his sixth visit to China in the past 15 months — to speak to political, business and academic leaders.
“Adhering to the commitment of ‘In China, for China’, AstraZeneca will further promote co-operation and bring China’s innovative healthcare solutions to patients around the world,” he said.
Then in May, at the Anglo-Swedish company’s first capital markets day in a decade — hosted at its new £1.1 billion Cambridge research and development centre — Soriot spoke bullishly about how AstraZeneca had become the No 1 pharma company in emerging markets.
“Leon Wang, who is very competitive, wants to be No 1 in every single country,” he said. “And in every single country, he wants to be No 1 in every therapy area where we operate.”
Now, just six months later, Wang finds himself under detention and AstraZeneca in the dark over his alleged wrongdoing and whether the crisis will deepen further.
Wang has been key to China becoming AstraZeneca’s second-largest market and the company becoming one of the biggest drugs multinationals in the country. About 13 per cent of its $45.8 billion total group sales were generated there last year, up from about 5 per cent a decade ago, and about 16,000 of its 90,000 global workforce are in the country.
After graduating from Shanghai International Studies University in 1993, Wang worked as a foreign language tour guide before entering the pharmaceutical industry.
• AstraZeneca signs $2bn deal with Chinese firm
Three years later he joined Roche in China, before moving to AstraZeneca in 2013, a year after Soriot was appointed from the Swiss multinational. In 2014 Wang was promoted to president of AstraZeneca China and in 2017 to global executive vice-president, responsible for strategy and business development in the Asia-Pacific region.
He has publicly advocated for the Chinese Communist Party. Marking AstraZeneca’s 30th anniversary in China in May last year, he said AstraZeneca should be a patriotic company in China that “loves the Communist Party and loves the country”.
Wang also has a reputation for a “quite radical style” and the company has been labelled as “the most radical company” in the industry, according to China News, which also reported that family members of AstraZeneca employees involved in the insurance fraud case posted an article on social media titled “An Open Letter to the President of AstraZeneca: The Company Makes Money, but the Employees Go to Jail?”
Peter Humphrey, a former corporate investigator jailed in China in 2014 during the fallout from the GSK bribery scandal, said there was speculation in the China pharma industry that the AstraZeneca case “is political” and that Wang is “politically connected and politically ambitious”.
But he also said: “Marketing cancer drugs is a particularly hot business in China because the newest, most advanced drugs from the West are in short supply due to lack of regulatory approvals.”
Since the insurance scam emerged AstraZeneca has been increasing its controls over the past three years, including through monthly compliance training and dedicated people in China reporting to its chief compliance officer.
AstraZeneca’s website suggests that the China leadership team is entirely Chinese apart from Joe Watson, the chief financial officer in the country and a former McKinsey partner.
While AstraZeneca’s audit committee has examined the “China market environment and healthcare industry trends, the enforcement environment, and how risks are being proactively managed”, China was not listed among the group’s “principal risks” in its last group annual report.
Despite the share sell-off — which has seen Shell overtake AstraZeneca as London’s most valuable company — some analysts currently remain optimistic.
Following Sarin’s briefing, Sean Conroy at Shore Capital, the City brokerage, said that until such time that AstraZeneca were to come under investigation itself, “we would caution people from drawing too many parallels between this and the bribery scandal that reared its head for GSK in 2014”.
Andrew Berens at Leerink Partners, the Boston-based investment bank, said: “Similarities are likely to be limited. The GSK case revolved around bribes to physicians and was ultimately tied to GSK’s inadequate compliance controls, resulting in about a $490 million fine to GSK with several executives sentenced to prison.”
He added: “While the ongoing investigation is likely to remain an overhang for shares, we think that fundamentally, the impact is likely to be minimal.”
However, Helen Chen, Greater China managing partner at LEK Consulting, based in Shanghai, said: “As we don’t yet have the resolution to the current AstraZeneca probes, we don’t know if the authorities will pull others in.”