All Part of an Era?.. The Lowdown on GSK China-gate

David Cameron’s defence of GlaxoSmithKline during his meetings with top government officials in China this week has highlighted intensifying efforts to resolve corruption accusations against the British pharmaceutical group.Cameron defends GSK during China tripChina’s ministry of public security in July accused GSK of being the “godfather” of a network of corruption involving up to $500m in bribes paid by company officials to doctors in the form of travel, entertainment, sexual favours and cash over six years. The alleged bribes, some channelled through travel agencies, were to encourage the prescribing of GSK products.

Has anyone been charged?

No, but four of the company’s top Chinese executives were arrested in July, and one, Liang Hong, made a television confession, as did Weng Jianyong, head of the Shanghai Linjiang travel agency used by GSK. More than a dozen other staff have been questioned.

Have any non-Chinese GSK staff been arrested?

No, but Steve Nechelput, the chief financial officer for the China subsidiary, was questioned and banned from leaving the country at the time of the accusations. Mark Reilly, the country manager who had left for a trip to London shortly beforehand, has since returned and been barred from leaving.

What about Peter Humphrey?

He is a British former journalist and longstanding consultant based in China, who was detained by the authorities along with his wife Yu Ying Zeng in August and made a televised confession that he used “sometimes illegal” methods to gather information. He conducted freelance work for GSK through his company ChinaWhys, including due diligence, although the company says his case “is being treated as a separate matter by the Chinese authorities”.

What is GSK’s defence?

Company officials will not comment on the details of the case but have expressed their “apologies” to the authorities for employees apparently acting outside of its internal controls – if only as a tactic to save face and speed up a resolution. Individuals with knowledge of the discussions say GSK has not been presented with detailed evidence and add that even if there was some bribery, $500m is the size of its total marketing budget in China during the period.

What was behind the attack?

One or more disgruntled former employees may have originally provided documents to the authorities. Some analysts have suggested a broader agenda: the new Chinese government is seeking to clamp down on corruption and to curb fast-growing healthcare costs. A British company could have been a useful target, given frosty relations earlier this year following Mr Cameron’s comments on human rights, notably in Tibet.

Have other companies been affected?

Drug companies including Eli LillySanofi and Novartis have since reportedinquiries from the authorities about alleged corruption, and others have received visits from regulators about pricing and antitrust activities. Many have said they have since redoubled efforts to ensure compliance in China, reported a slowdown in sales contacts with doctors and stopped working with some local travel agencies. Baby-milk producers including Danone have been accused of bribery and anti-competitive practices. Danone has said it is investigating the allegations. Some Chinese drug companies have also been probed.

What actions has GSK taken since?

It rapidly replaced Mr Reilly, naming Hervé Gisserot as the new China manager. It sent Abbas Hussein, head of non-US commercial business, to negotiate with the authorities, and its global internal audit head has been in Shanghai ever since. It has appointed Ropes & Gray, a law firm, to conduct an internal investigation.

Will GSK withdraw or be banned from China?

Highly unlikely. The company has said it remains fully committed to the country. While rumours of a threat to withdraw could be a negotiating tactic, it would make little sense for either side. China is a fast-expanding market for GSK and a growing source of scientific expertise.

Will there be long-term damage to the company?

GSK reported sales of drugs and vaccines in China down 61 per cent in the third quarter. Many investors have shrugged off the likely direct financial impact, pointing out that domestic revenues are modest (less than 4 per cent of group sales) and it could easily pay a fine of several hundred million dollars without a meaningful impact on performance. The greater concern is if US or UK anti-corruption probes begin, or concerns over poor compliance and governance destabilise top management.

Has GSK faced other problems in China?

Earlier this year it said it investigated whistleblower reports of bribery linked to sales of Botox in China and found no substance to them. It also fired Jingwu Zhang, a senior Chinese researcher in Shanghai, after claims of scientific fraud in a paper he wrote on one of its experimental drugs.

What is the likely outcome?

Sir Andrew Witty, GSK’s chief executive, has hinted at price cuts and dropping commissions in China. Prosecutions may focus on individual Chinese executives while the company could well face a fine for inadequate controls.


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