Red and Yellow shares shrink, market value evaporates by $300 million What warning does it give to pharma?

Although the industrial field is far away, but the red and yellow blue in the crisis under the market performance, has been enough to let all the pharmaceutical enterprises to cause alarm: if the status quo of the low cost of violation of the law is not enough to make the pharmaceutical enterprises to enhance the awareness of the compliance of the operation, but due to the crisis of the incident of the performance of the market value as well as the impact of the enterprise's reputation is a fatal thing!

Following the Ctrip Parent-Child Park child abuse case caused strong social concern, "China's first independently listed pre-school education brand," red and yellow blue was again exposed to child abuse. The bad behavior, such as sticking needles, feeding pills, standing naked and even molesting children, made the matter quickly fermented in public opinion and triggered an uproar.

This is not the first time a similar incident has occurred. From the Zhejiang Wenling kindergarten teacher abused children nearly 100 times, to a kindergarten classroom in Shanxi even slapped children more than 70 slaps, to a kindergarten in Hebei, 3 years old and a half boy was physically punished by the caregiver, and then to the recent Ctrip, red and yellow incident, the child abuse incident seems to have never disappeared from people's attention in the line of sight.

The key question is, why do kindergarten child abuse incidents happen again and again? Leaving aside the state of mind and moral quality of the people involved, what is the bottom line that they dare to commit this unlawful act?

The answer is basically clear: the low cost of violating the law. From past reports, the final result of the relevant child abuse cases, nothing more than kindergarten teachers to the victimized children and families to apologize, or to give part of the compensation, serious, but also nothing more than the kindergarten teachers involved in the dismissal, or briefly by the public security organs to control, and therefore the real in the criminal penalties, few and far between, for the institutions involved in the punishment, also rarely seen.

But what are the organizations involved afraid of? It is also very obvious: market performance. As a U.S. listed company, red and yellow kindergarten child abuse incident broke out, soon the capital market gave a reaction: the share price shrinkage of more than 40%, has fallen below the issue price, the market value of evaporation of 300 million U.S. dollars. Red and yellow blue also had to take out the first time 50 million dollars for share repurchase, but the effect is very little.

On the surface, red and yellow blue in the field of early childhood education, and the pharmaceutical field and what is the relationship? But in fact, despite the industrial field is far away, but the red and yellow blue in the crisis under the market performance, has been enough to let all the pharmaceutical companies to cause alarm: if the status quo of low cost of violation of the law is not enough to make the pharmaceutical enterprises to enhance the awareness of compliance, but because of the crisis on the market value of the performance of the company's reputation is a fatal thing!

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Frequent cases, the low cost of violating the law can not be ignored

A very clear fact is that, similar to other industries, the low cost of violating the law in the pharmaceutical industry has become an important factor in the continuous illegal and irregular behavior of pharmaceutical enterprises.

In recent years, the growing concern about environmental issues, for example, relevant information shows that, as a major producer of chemical APIs, China in the field, especially in the production capacity of fermented drug products ranked first in the world, accounting for about 70% of global production. The API production process "three wastes" due to the complexity of the composition, the pollution hazard is serious, has been the attention of the regulatory agencies, since 2017, the environmental protection department has also increased the supervision, especially in the main production area of APIs in Shandong and Hebei provinces.

However, it is not uncommon for pharmaceutical companies to be penalized for environmental issues, yet the punishment is far from strict.In September 2017, Yinchuan City imposed a fine of 2.2 million yuan on six pharmaceutical companies in accordance with the Air Pollution Prevention and Control Law, which is less than 400,000 yuan each on average; in March 2017, Shandong Keyuan Pharmaceutical, a new three-board-listed company affiliated with Linuo Group, exceeded the standard for the emission of air pollutants, and was fined only 200,000 yuan; and in In 2015, the environmental violation record has accumulated a number of times in Shandong Lubai pharmaceutical again due to environmental issues were punished, the fine is only 50,000 yuan. Compared to the tens of millions of dollars of annual profits of pharmaceutical companies, the amount of fines can play a deterrent effect is obvious.

Again, such as quite a long time since, drug companies violate the GSP behavior more and more frequently. Including insufficient quality management of the cold chain, temperature and humidity falsification, warehouse management is not in place, etc. affect the quality of drugs and other behaviors occur from time to time. Regulators have also begun to react quickly, according to incomplete statistics, in 2016, the country revoked the GSP certificate of a total of 739 pharmaceutical enterprises, including 168 provincial bureaus and 571 municipal bureaus. It is worth noting that this has been the harshest penalty for such violations, but despite this, the enterprises concerned can still reapply for the certificate six months after they stop operating.

As for pharmaceutical companies in the publicity of the product, the use of illegal advertising, exaggerating the scope of adaptation of the product, false propaganda, etc., the current penalties for pharmaceutical companies is even more insignificant, the treatment measures are no more than ordering the cessation of, severe admonition, revocation of the approval number of the advertisement and so on. However, in foreign countries, the cost of violation of such incidents is much higher. More than a decade ago, AstraZeneca was fined $355 million for inducing doctors to use a drug, and in 2009, Pfizer, the world's largest drug maker, agreed to pay about $2.3 billion in penalties for improper marketing of 13 drugs.

Similar "astronomical compensation" made by pharmaceutical companies in the United States is by no means an isolated case, especially for the quality of the litigation caused by problems such as the importance of. Johnson & Johnson had a talcum powder sanitary products due to the potential risk of cancer in the United States received more than 4,800 lawsuits, of which the highest compensation judgment of Johnson & Johnson compensation of 417 million U.S. dollars.

In fact, the low cost of violating the law has existed for many years, and its impact has gradually been recognized, and a series of new measures have been introduced. Still take environmental issues as an example, the new "Environmental Protection Law", which is said to be the strictest in history, stipulates that enterprises, institutions and other production operators shall discharge pollutants in violation of the law and be punished by fines, and be ordered to make corrections, and if they refuse to make corrections, according to the law, as the administrative organ that decides on the punishment, it may impose consecutive penalties on a daily basis in accordance with the amount of the original punishment from the day following the day of the order to make corrections. This is considered to be a great increase in the cost of violation of the law, but in practice the effect of how, from the cases in the past year, compared to the previous punishment has indeed increased, but for the enterprise, it seems that it is still a drop in the bucket.

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Vigilance against unexpected events triggering a crisis

It is because of the reality that the cost of breaking the law is low, even as the cost of compliance is high, that it is difficult for pharmaceutical companies, or any other type of business, to develop the motivation to operate in compliance under the deterrent of regulations. What pharmaceutical companies must be wary of, however, is unexpected events similar to those that led to the current plunge in the share price of Red, Yellow and Blue. As it turns out, the rosy story previously told in the capital markets at the expense of significant resources is likely to go up in flames as a result of an unexpected outbreak.

This situation is not without precedent. The U.S. pharmaceutical company Ariad previously quadrupled the factory wholesale price of its drug Iclusig, a treatment for leukemia, to $199,000 a year, and U.S. non-partisan independent legislator, Senator Bernie Sanders, launched a diatribe on the matter on his official Twitter account, following which the company's shares plummeted by nearly 15 percent and its market value of $387 million evaporated instantly.

Similarly, the globally recognized Israeli company Teva Pharmaceuticals was previously charged in connection with the U.S. Foreign Corrupt Practices Act after it was revealed that one of its subsidiaries had paid bribes to win business in Ukraine, Mexico and Russia. The end result was that Teva ended up paying a $519 million fine.

In addition to the impact on market capitalization and performance, the impact on a company's reputation is equally significant. To a few years ago shook the country's "poison capsule" incident as an example, on April 15, 2012, CCTV "Weekly Quality Report" exposed that some enterprises in Hebei used quicklime to decolorize and bleach leather waste and clean it, and then boiled it to make industrial gelatine, which was sold to medicinal capsule manufacturers in Xinchang County, Zhejiang Province, and ultimately flowed to pharmaceutical companies. After investigation, it was found that the heavy metal chromium content of 13 batches of capsules used in medicines from 9 pharmaceutical companies, including some star pharmaceutical companies at that time, exceeded the standard, with the most exceeding the standard by more than 90 times. This incident has directly led to the "tainted capsule" enterprises are still haunted by people until today, and its corporate image is difficult to restore.

In short, corporate compliance should not be a thing forced to complete under the strict laws and regulations, when non-compliance occurs, there are always some potential dangers in the undercurrents, like a gunpowder that has been lit fuse, may explode at any time. On the one hand, with the gradual improvement of national and industry laws and regulations, the increase in the cost of violating the law is a matter of necessity; on the other hand, the market will always make the most direct response, want to avoid the emergence of similar crises, compliance has been a matter of necessity.