China milk powder crackdown is tough medicine for doctors, sales representatives

By Adam Jourdan

SHANGHAI (Reuters) - A crackdown on corruption in China's infant milk formula sector has made sales representatives and hospital doctors fearful of talking to each other, putting a brake on marketing and possibly hitting revenue growth for foreign firms.

Chinese media have repeatedly accused foreign milk powder makers, notably France's Danone SA , of paying bribes to medical staff in return for recommending their brands to new and expectant mothers.

The French food maker said this week it will appoint new management at its Dumex infant formula operation in China following a bribery scandal at hospitals in the country's north.

China is a magnet for foreign infant milk formula makers, with the $12.4 billion market expected to double by 2017.

But investigations by Chinese authorities and reports in state media, often quoting whistleblowers, have curtailed marketing activity at hospitals.

"Since the 'First Drop of Milk' expose, no matter what brand of milk powder, none of the reps have been coming," said a nurse at a top Shanghai hospital.

The nurse, who declined to be identified, was referring to a recent report by official China Central Television (CCTV) that claimed milk powder firms were bribing doctors to recommend their brands as the first milk substitute a baby tastes.

While hospitals only account for 3 percent of overall infant formula sales in China, they are key for companies trying to get parents to buy their brand, according to a Chinese research firm, Beijing Shennong Kexin Agribusiness Consulting.

"A doctor's recommendation has the biggest impact," the firm said in a recent report. "Once a patient has chosen a product, the likelihood of them changing to another brand is very small."

Much of the scrutiny has been on Danone. Besides Dumex, its Nutricia advanced nutrition unit has also been accused in state media of bribing doctors to boost milk formula sales. Danone has said it was investigating that report.

Danone's woes in China are likely to feature when it announces third-quarter results on Wednesday.

A Reuters poll of six analysts showed like-for-like baby food sales to fall 3 percent in the quarter, reversing a 15.2 percent jump in the first-half.

It's unclear how much China will account for this reversal. But China is an important market for Danone's baby food division, which accounts for 20 percent of group sales, making it the No. 2 contributor after dairy.

Indeed, the impact on foreign milk powder makers mirrors that of global pharmaceutical firms, with many doctors at Chinese hospitals refusing to also see drug reps for fear of being caught up in a widening graft scandal in that sector.

"Milk powder firms now have to change their marketing and communications strategy. They can't focus on hospitals so much, which is going to hurt," said the head of a marketing firm that works with foreign milk powder makers in China.

The executive asked not to be identified because Chinese officials recently audited his firm, looking for irregularities that could be tied to bribery. Many marketing firms work with foreign companies on their sales strategies.

DOCTORS WORRIED

Corruption in China's medical sector is widespread, fuelled in part by low base salaries for doctors and nurses at the country's 13,500 public hospitals.

Milk powder is also a sensitive topic since a 2008 scandal involving milk tainted with the industrial chemical melamine killed at least six infants and left thousands more ill.

This damaged the reputation of local firms and boosted the market share of foreign brands, which now account for close to 80 percent of the infant formula market in major cities, according to data from Rabobank.

In September, the Health Ministry warned doctors against taking bribes from milk powder sales staff and said medical workers could not push baby milk on new mothers.

International guidelines used in China say doctors should promote breastfeeding unless there are medical reasons not to.

A trainee doctor in Shanghai said the head of medicine at his hospital recently sent all doctors a text message asking them to report their kickbacks in an attempt to rein in the practice.

Several doctors said they knew, or had heard of, doctors who had been arrested for accepting bribes or gifts from sales reps, which had put many on edge.

On Monday, authorities in the northern city of Tianjin said they had punished 13 medical workers for taking bribes from Dumex to recommend its infant formula. It was unclear if this included doctors.

Meanwhile, the Health Ministry's family planning unit is preparing a sector-wide "clear up", a spokeswoman told CCTV in a recent interview.

"(The investigations) will definitely create a sense of threat, at least in the healthcare services sector, as doctors become more reluctant to interact with sales reps of the multinational milk powder makers," said Katherine Wang, chief China life sciences advisor for law firm Ropes & Gray.

RIVALS

The probes are the latest headache for foreign companies in China after the government temporarily banned milk powder products from New Zealand dairy exporter Fonterra after a food scare. Tests later showed this to be a false alarm.

Authorities in August also fined a group of mostly foreign milk powder producers including Danone a total of $110 million for price-fixing.

At the same time, China has emphasised its support for home-grown rivals, with local media saying the government will give 30 billion yuan ($4.91 billion) to Chinese milk powder makers to help them compete with international rivals.

Analysts said all these factors were likely to slow growth for foreign companies.

"The increased scrutiny of business practices in China is likely to curb the top and bottom lines for global baby formula makers," said Tom Pirko, food & beverage consultant at Bevmark.

($1 = 6.1079 Chinese yuan)

(Additional reporting by Dominique Vidalon in Paris, Martinne Geller in London and the Shanghai newsroom. Editing by Dean Yates)

Source: http://news.yahoo.com/china-milk-powder-crackdown-tough-medicine-doctors-sales-203808564--sector.html
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