China accuses GlaxoSmithKline of bribery

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In a case of man bites dog, the Chinese government is accusing GlaxoSmithKline of bribery. It’s definitely a twist, but the allegations from the Chinese government are likely to send ripples through the international business community.

Here’s the story from the Wall Street Journal:

China signaled a tough new stance on health care as it unveiled a litany of bribery and misconduct allegations against GlaxoSmithKline PLC, a move that could presage a broader crackdown in a lucrative market for pharmaceutical and medical companies.

At a news conference on Monday, officials within the Ministry of Public Security’s economic crime investigation unit said four high-level Chinese Glaxo executives have been detained over allegations of severe violations of Chinese law. The officials accused Glaxo staffers of using travel agencies as vehicles to bribe government officials, hospitals and doctors in order to sell more drugs at higher prices.

“A large part of their strategy for sales and marketing has been to conspire and encourage the possibility of commercial bribery,” said Gao Feng, a ministry official spearheading the probe of the U.K. pharmaceutical company.

Mr. Gao said Glaxo and the travel agencies exchanged 3 billion Chinese yuan ($489 million) between them since 2007. Mr. Gao didn’t make clear whether any of that money was used for legitimate travel purposes. The travel agencies also offered what he called sexual bribes to senior Glaxo executives to keep the company’s business, he said, without providing further details.

The New York Times story outlined the potential downside for GSK and how damaging the charges could be for their long-term revenue:

The possible punishments or fines for GSK are unclear, experts said, but the investigation is almost certain to cause concern among the ranks of major multinational companies operating in China.

In recent weeks, regulators in China have stepped up their scrutiny of multinationals. After dairy producers were accused of price-fixing, several of them announced price cuts.

GSK is one of the world’s leading pharmaceutical companies. Last year, it recorded nearly $40 billion in revenue worldwide by selling popular drugs like Paxil, Avandia and Zantac.

Although China still accounts for a small portion of GSK’s revenue — about $1.2 billion last year — it is one of the company’s fastest-growing markets and home to 6,000 employees as well as large manufacturing and research and development facilities.

On Monday, the government said four senior executives from GSK’s China offices were being detained, including the head of the drug maker’s legal department, the head of business development and two vice presidents. The four held are all Chinese nationals, the police said.

The investigation is a huge embarrassment for GSK, which recently fired the head of its research and development department in Shanghai for misrepresenting data in a paper he co-wrote in 2010.

And according to Reuters, China is only going to grow in importance for drug makers and other international companies:

Under China’s legal system, formal charges would only be announced after preliminary investigations are completed.

The ministry last Thursday said the case against GSK involved a large number of staff and covered an extended period of time, with bribes offered to Chinese government officials, medical associations, hospitals and doctors to boost sales and prices.

China is an increasingly important country for international drugmakers such as GSK, which are relying on growth in emerging markets to offset slower sales in Western markets where many former top-selling medicines have lost patent protection.

IMS Health, which tracks pharmaceutical industry trends, expects China to overtake Japan as the world’s second biggest drugs market behind the United States by 2016.

The charges of bribery make the GSK case the highest profile probe in China since four executives of mining giant Rio Tinto Plc were jailed in March 2010 for taking bribes and stealing commercial secrets.

As companies vie to increase their business in the Chinese market, the government’s reaction and policies will become increasingly important. While Glaxo is under investigation by U.S. authorities, according to the Wall Street Journal, the Chinese are trying to control prices for drugs:

Health-care expenses and pricing are highly sensitive issues in China, said Rob Morris, managing director of advisory firm AlixPartners, noting that the country has developed anticompetitive laws to create increased pricing stability

China’s regulators have in recent years set price restrictions on pharmaceuticals. In January they implemented price cuts of 20% on more than 400 drugs used for respiratory diseases and pain-relief medications, affecting pricing for domestic and foreign companies, such as Pfizer and Novartis AG.

Mr. Morris said enforcement has been loose in health care despite clear anticorruption laws, yet that appears to be changing. For many companies that will open risk of accusations by authorities of corrupt behaviors, Mr. Morris said.

Glaxo, alongside other pharmaceutical makers, is being investigated by U.S. authorities over whether it paid bribes to foreign government officials.

For a country with more than 1.3 billion people, access to drugs and healthcare at a reasonable cost will be critical for the government to keep power. Drug companies are also looking for ways to continue to fund new medicine and increase revenue, making this an important story for the business media.