Doing business in China's health care space just got a lot more complicated.
Regardless of what narrative may ultimately prove to best explain GlaxoSmithKline's (GSK) current problems in China – lax reinforcement of internal compliance standards, local Chinese authorities in pursuit of a foreign pharmaceutical firm's practices before turning their attention to those by domestic players, or an extension of Xi Jinping's anti-corruption policies – the fact remains that doing business in the sector for multinationals will never be the same.
The world's leading pharmaceutical, medical device and diagnostic manufacturers are watching the GSK scandal unfold, asking themselves how this scandal will impact their China business.
In most of these companies' home markets, the combination of price pressures, maturing patents, and soaring R&D costs, mean that one of the sector's few glimmers of hope remains sales in emerging economies.
While the GSK scandal will inevitably increase compliance costs and may depress revenues in China as multinationals reign in their domestic Chinese sales teams, the industry will look back at this moment as a necessary – if painful – step forward in the effectiveness of China's health care system and their ability to compete within it.
(Read more: Glaxo CEO 'deeply disappointed' by China scandal)
For China's health care reforms to be successful, something along the lines of the GSK scandal had to happen. Since China began its economic modernization, one of the areas the government has consistently under-funded and over-looked has been the nation's health care system.
As the private sector began to play a more important role in China's economy, the central government rolled back much of the funding for public clinics and hospitals.
The gap this created was filled by a host of bad practices, two of which continue today: extensive back-door payments to doctors by pharmaceutical, device and diagnostic firms to ensure the doctors prescribe their products, and the so-called "red envelope" or hongbao payments families make directly to doctors in order to be seen when a loved one requires care.