In Korea, over 2,100 companies are registered as medication manufacturer. There’s a small company that managed to make it to be one of top 100 pharma companies in sales, barely surviving fierce competition with mega pharmaceutical companies of 1 trillion KRW (approximately USD 841 million) in annual sales.
Following story is about one of the small pharma companies, Inist Bio Pharmaceutical. It reveals the illegal kickback sales practices in pharma industry. To expose this deeply-seated problem of pharma and medical sectors, one of Inist’s salesperson -- whom we call ‘kickback delivery men’ or Mr. A in this story -- has decided to end his career and become a whistleblower by talking to the Korea Center for Investigative Journalism(KCIJ)-Newstapa.
According to resources provided by Mr. A, a sales representative at Inist Bio Pharmaceutical, and additional investigations by KCIJ, this company has been offering illegal kickbacks to doctors since at least 2016 until recently. Salesperson were instructed and managed by the company to deliver kickback to their client doctors to induce them to exclusively prescribe the company’s medicine.
Inist planned out and operated the kickback sales system strategically. The company prepared the fund for kickback, and deposits the money every month into each sales representative's secret bank account, which he or she operates separately from their official payroll accounts.
In Korean pharma industry, the money which the company officially provides for kickback is called ‘budget.’ According to Mr. A, the company usually provide the so-called ‘kickback budget’ ranging from 2 to 20 million KRW every month, an amount equivalent to 20 to 40 percent of each client's prescription sales. Mr. A said the company provided him the budget of up to 15 million KRW a month. His secret account transactions showed that the originator of these funds were written as ‘Inist Bio,’ and the originating bank was Industrial Bank of Korea, the financial institution Inist mainly traded.
Salesperson withdraws the kickback budget in cash and deliver this ‘prescription honorarium’ to doctors. The doctors accept kickbacks in return of exclusively prescribing specific medicine. In 2016, Mr. A offered a kickback worth up to 40 percent of the monthly prescription sales. This means, for instance, when a client doctor prescribes 10 million KRW worth of Inist-brand drugs, he or she can receive 4 million KRW in cash. The company offers kickbacks of 20 to 25 percent as of 2019, after reducing its kickback ratio by about 5 percentage points every year.
The company adjusts the kickback payment ratio every year, and announces the new number at the company’s new year’s kick-off meeting, which all Inist staffs across the nation have to attend. The company calls only salesperson in a separate meeting, where the company’s sales director secretly announces the so-called ‘policy ratio’. The executives also prohibits staffs from taking photos of the numbers to not make any evidences that the company managed the illegal sales practices.
"The executives show a table with different ratios depending on prescription amount,” Mr. A said. “As soon as the table's up on screen, they order the salespeople to keep their smartphones down.”
The whistleblower, Mr. A explained that Inist CEO officially approved the amount of large-sum kickback and was engaged in kickback delivering himself. It’s unusual for a drug company CEO to be directly involved in delivering the shady money.
In 2016, when Mr. A joined Inist, he tried to get his client Dr. Choi, a big-name dermatologist who owned three clinics in Seoul and Gyeonggi, to switch to Inist-brand drugs. Choi demanded him 'pre-payment,' a type of kickback in Korean pharma industry which a company provides a doctor with monthly kickback worth half a year or a year at lump sum in return for switching all drugs.
For Inist, making a deal with Choi would bring more than 15 million KRW in monthly prescription sales from three clinics. Mr. A wrote an expense request form that he needs 30 million KRW in the pre-payment to Choi, and submitted it to the company’s management. The form was approved by the sales director and the company’s CEO Kuk-hyun Kim, current chairman of Inist Group. Kim showed up at Choi’s clinic in person to deliver the lump-sum kickback, according to A.
“The CEO said he wants to deliver the money in person. His driver dropped him off in front of the clinic, and I greeted him. He went up to the 8th floor, where the clinic's located, alone,” Mr. A said. “Meanwhile, I waited at a nearby cafe with the deputy president.”
According to phone call recordings between A and Choi, the doctor acknowledged that he’s met Inist CEO Kim and asserted that he decided to agree with the drug sales deal with Inist because of the CEO -- not because of relationship with A.
Illegal funds for kickback’s estimated multi-billion KRW, allegedly generated from accounting irregularities
Similar cases occurred in the past help understanding how the pharma industry launders illegal funds prepared for kickback. Faking and distributing spending accounts are the classic methods in laundering.
● "Preparing cash by falsely accounting irrelevant receipts, for which salespeople used on personal purposes, and use the money in kickback to client doctors" (Dec. 2014, Seoul Western District Prosecutors' Office investigation into Dong Wha Pharmaceuticals’ kickback case)
● “First purchasing gift cards with the company’s budget and reselling the cards to obtain cash, which would be offered to doctors and pharmacists" (Aug. 2014, Seoul Western District Prosecutors' Office investigation into CMG Pharmaceutical kickback case)
● "Regularly offering hospitality to clients hospitals and clinics, and accounting such spending as sales cost and employee benefits" (July 2010, National Tax Service's tax investigation on companies that offered kickback)
Inist Bio Pharmaceutical saw a sharp increase in sales between 2016 and 2018. According to the company's audit reports, drug sales doubled to 53 billion won in 2018, from 27 billion won in 2016. The whistleblower A explained that the company has steadily cut its kickback ratio every year in an effort to make up for its operating profit. Despite the kickback reduction effort, the total amount of kickback spending is structured to increase as the drug sales doubled in the meantime considering the company’s sales policy.
The company’s annual kickback budget is estimated to reach at least several billions of KRW. Out of 270 Inist employees, 90 are sales representatives. If each sales staff gets 3 million KRW every month from the company in kickback budget just as Mr. A does, the company has to prepare at least 3.24 billion KRW in cash every year. If each staff performs so well and needs 5 million KRW to give back to doctors every month, the amount of illegal funds the company has to prepare shots up to an annual 5.4 billion KRW. It is nearly impossible to account such a huge illegal money as if it’s normal marketing or sales promotion spending.
Inist’s financial statements are fishy in many ways, considering similar kickback investigation cases and Mr. A’s explanation. According to its statements, the company’s employee welfare spending recorded 3.07 billion KRW in 2018, three times larger than a year prior. It’s employee transportation spending was 2.074 billion KRW in 2018, about 2.5 times larger than 2017. The spending in ad campaign was 3.49 billion KRW in 2018, 1.4 times larger than the past year. Meanwhile, the number of employees barely changed, from 264 in 2017 to 277 in 2018. There seems to be no factor in the increase just within a year, considering the three accounts are mainly affected by number of employees.
Just like cases seen in past kickback investigations, Inist has collected random receipts from salesperson and accounted them as if they’re made out from the company’s expenses. According to Mr. A, sales representatives submits personally-used receipts issued at random places like restaurants and gas stations to make up the amount of kickback they paid to doctors for the month. Then, the company’s management and accounting team count the receipts under its different accounts such as advertisement, transportation and welfare expenses. Even if a sales staff submitted a receipt that someone else used, the company didn’t care.
“We had to ask restaurants we know well to collect some receipts that other guests throw away,” A said at an interview with KCIJ. “The collection of receipts are added up to the right amount as the company wants, but each receipt is issued under random names and random purposes. So, we the salesperson all know that the receipts won't be considered as reasonable evidence at the end of the day.”
The way Inist prepared budget for illegal kickback and distributed money is an old trick in the pharma industry. Although such trick was so well known to investigators, the drugmakers remain careless as long as they don't get caught.
Since November 2010, the Korean government implemented the so-called ‘kickback dual punishment system’ to punish both the kickback giver and taker. Under the law, both giver companies and receiver doctors are subject to three years in prison or up to 30 million KRW in fine. Doctors may face their license suspended or revoked for up to a year. The Fair Trade Act also allows the Fair Trade Commission to investigate the giver company and impose fine for unfairly attracting customers.
However, the punishment regulations and administrative measures are powerless in reality. Regardless of the regulations, the giver drugmakers and receiver doctors still take the risks for interests.
According to the Ministry of Health and Welfare data collected for the 2018 parliamentary audit, 188 cases of illegal kickback worth 49.5 billion KRW were found in the pharma industry, which ranges from drugmakers to wholesale dealers, from 2015 to 2019.
By year, 30 cases worth 10.8 billion KRW were reported in 2015, 96 cases worth 22 billion KRW in 2016, 35 cases worth 13 billion KRW in 2017, and 27 cases worth 3.7 billion KRW in 2018.
Korean Ministry of Health and Welfare is in a legal battle with a number of pharma companies that were found to have given illegal kickbacks but refused to comply with the government’s punishment.
As a punishment, the Health Ministry ordered an administrative measure to cut price for those drugs that were found to be subject of kickbacks, because the kickback sales practices result in rise of drug prices and eventually hurts the national health insurance finances. In addition, as kickback makes doctors use only certain brand’s drugs regardless the drug’s suitability in treatment, it intrudes patients' access to options of various brand drugs. As the size of kickback is determined by prescription performance, doctors are more likely to over-prescribe to patients.
To curb drugmakers’ motivation for kickback, the Health Ministry last year ordered price cuts for 340 medicines by 11 companies in a punishment for offering illegal kickback. One of the impacted companies was Inist.
Despite the measures, the companies rather filed a lawsuit against the ministry to cancel the price cuts. Of companies that filed lawsuit, four drugmakers won the first trial in November 2019.
Inist Bio Pharmaceutical is in a lawsuit with the Health Ministry demanding it withdraw the price cut measures. According to the past court ruling, Inist gave out a total of 158 million KRW in kickback to 13 doctors for five years since 2007, which happened before Inist CEO Kuk-hyun Kim acquired the company.
In 2012, then-CEO was indicted of a number of charges including violation of Pharmaceutical Affairs Act, and eventually was sentenced to six months in prison with a sentence suspension of one year. In addition, the Health Ministry ordered a price cut for 49 drugs involved in kickback in 2017 for two years.
However, Inist refused to follow the administrative measure to file a lawsuit. The company lost both the first and second trials, but is now in appeal to the Supreme Court. This means that the company kept giving out illegal kickback even during a lawsuit against the government.
Prior to releasing this story, KCIJ has done its best to verifying the whistleblower, Mr. A, and sources he provided by repeatedly reviewing his words and records. Since last October, the KCIJ reporters had seven meetings in person, and an additional written interview. The whistleblower consistently made same statements to questions. The reporters also visited the locations where the whistleblower handed money to the doctor to check and verify his arguments. After lastly comparing his arguments with bank transaction details and prescription and kickback payment records, the reporters concluded that the arguments were trustworthy.
The reporters visited Inist’s headquarters to deliver a list of questions and asked for an official statement about kickback sales practices.
"Our executives has never ordered or managed illegal business practices," the company said in a written statement. “We hold regular compliance training sessions for the sales department, and take measures when any employees are found to have done illegal business practices.”
KCIJ also reached out to Dr. Choi several times via phone call and text messages to explain purpose of the investigations and request his counterarguments on the suspicion of accepting kickback. However, Choi did not respond. Instead, just after KCIJ’s request, he was found to have called the whistleblower and asked if anything went wrong to Inist and its sales representatives.
Mr. A, the whistleblower, reported his employer’s organized management on kickback sales practices to the Anti-Corruption and Civil Rights Commission before reaching out to KCIJ. Recently, the case was transferred to the police and the Fair Trade Commission, and now is waiting for investigations.
The whistleblower confessed that he has personally spent parts of the kickback budget he obtained from the company, and he's also determined to undertake any legal responsibilities that may be raised.
As an Inist salesperson, he supplied the company’s drugs to more than 10 private clinics in Seoul and Gyeonggi-do Province. He offered cash kickback in exchange of monthly prescription amount to those doctors who prescribes Inist drugs for at least several million KRW per month. Dr. Choi is one of those receiver doctors, who also accepted a lump-sum pre-payment kickback from Inist CEO.
The relationship between Mr. A and Dr. Choi turned sour in the summer of 2019 as the salesperson missed payment day. Choi pressured him quite bluntly, repeating that he may switch to other brand’s drugs. The salesperson became disenchanted about kickback-based sales, as Choi grew more pushy. He reported to the anti-corruption commission that he delivered kickback in cash worth more than 100 million KRW for three years since 2016.
Above video report unveils how kickback sales works and how Dr. Choi led Mr. A to speak up about the practices.
Reporting by Jiyoon Kim, Wooram Hong
Video by Sang-chan Lee, Joon-sik Oh, Hyung-seok Choi, Young-cheol Shin
Video Edited by Jisung Jung
CG by Dong-woo Jung
Design by Do-hyeon Lee
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