It's China, what did you expect? Its healthcare system is a pit of corruption, the result of underfunding by a government that prefers skyscrapers to hospitals. That seems to be the City's relaxed view of the bribery allegations made against GlaxoSmithKline's Chinese operation. Analysts coolly conclude that a country accounting for 3% of group sales can't inflict any serious damage. The share price has barely budged since the storm broke.
The City's view is too breezy for at least three reasons. First, reputation matters to drug companies these days – and matters in particular to chief executive Sir Andrew Witty. He has been on a clean-up campaign during his five years in charge. Last year, when GSK paid a $3bn fine for mis-selling drugs in the US, Witty said he was dealing with "echoes of the past" and announced his determination that such events would never happen again.
Nobody should doubt his sincerity but the Chinese allegations, if they are proved, would represent a serious failure of management. As far one can tell, GSK put in audit controls that it thought were sufficient for China; it may have been bamboozled by a sophisticated internal scam that was hard to spot without access to private bank accounts and emails. But that would be an explanation of failure, and won't help GSK on the image front. Witty the unwitting is poor branding when you are dealing with governments around the world.
Second, GSK will probably have to rethink its entire model of doing business in China and other "high risk" countries. That signals disruption ahead as internal compliance controls are overhauled yet again.
Third, even after any fines are paid in China, GSK will have to arrive at a working arrangement with a central government that appears to have a twofold agenda of running an anti-corruption drive and getting more funding into its dysfunctional healthcare system. If you're an optimist, greater opportunity for GSK could emerge from the mess – profit margins of drugs might fall but the reward could be greater volumes and a better-regulated market. But, to judge by the current aggressive rhetoric in China, the road to that position could be very long indeed. The story is still developing, but the City looks to be underplaying it.