Britain’s biggest drug maker did not know it was under criminal investigation in China until police stormed its Shanghai offices in late June. When news filtered back to London, executives were non-plussed and scrambled to try to get details of what was going on.
Now there is little doubt GlaxoSmithKline is embroiled in one of the biggest criminal inquiries into bribery ever conducted in China and its executives in the UK capital are poring over the details.
Like any approaching tidal wave, it started with just a few ripples. The first came in February, when Chinese authorities called around the world’s drug giants demanding information about their pricing practices in the country.
At the same time, GSK was dealing with a separate investigation prompted by whistle-blower claims that sales executives were plying Chinese doctors with extravagant gifts in return for prescribing its products.
GSK was confident the allegations were unfounded. When they became public in June, it issued a statement revealing the “significant resources” it had used to “thoroughly investigate” the claims. “GSK wants to reiterate to its patients, staff and partners in China that these allegations are false,” it declared.
It wasn’t long before events took a darker turn. Shortly after the raid on GSK’s China headquarters, a statement came from authorities in the regional city of Changsha announcing that certain individuals were under investigation for “economic crimes”.
Since then, four of GSK’s senior executives have been arrested by Chinese police without formal charges. Several more are under house arrest, and one British executive is forbidden from leaving the country.
One of the detainees was paraded on state television last week to make a public “confession” to bribery. The other three have allegedly admitted to corrupt practices during police questioning.
At the same time, a chilling message delivered by Beijing’s top official for economic crime, Gao Feng, left the rest of the industry in no doubt that they too could face the same treatment.
“Frankly speaking, from our investigation we have also found some clues of illegal money transfers involving other foreign companies. Whether they have been involved in these allegations we are not so sure now. Probably you better ask them yourself. One question is enough: Can you sleep well at night?”
Eugene Chen, compliance and investigations partner with Hogan Lovells in Shanghai, expressed surprise at the magnitude and aggressiveness of the government’s approach.
“There’s been a lot of [civil action] in this area, but we have not seen a large-scale criminal investigation,” he said. GSK stands accused of widespread bribery and corruption in China and police say they have the evidence to prove it.
This is yet to be seen, but the accusations have been spelled out by the Chinese authorities.GSK sales representatives have allegedly paid out up to 3bn renminbi (£320m) in bribes to every level of the Chinese healthcare system using the country’s network of 700 so-called travel agents, the local term for conference organisers.
The practice, say the police, has won the company more sales, clinched higher prices, and has been going on since 2007. The accusations go further still: GSK staff are alleged to have accepted bribes and even sexual favours from travel agents desperate for the financial rewards associated with facilitating the illicit payments.
GSK is on red alert. It has dispatched its head of emerging markets with a team of internal auditors and lawyers to the country to carry out an investigation. The evidence uncovered so far appears to give some support to the allegations. Ernst & Young has also been hired to conduct an independent inquiry.
The Daily Telegraph disclosed yesterday that Sir Andrew Witty, the chief executive, is preparing to admit to major compliance failings in China when he faces investors this week at its second-quarter update. He also plans to travel to China to repair relations and try to support the state’s attempts to clean up the drug market.
The company has also halted the use of travel agencies and is looking at all third party relationships in the country. “GSK shares the desire of the Chinese authorities to root out corruption. These allegations are shameful and we regret this has occurred,” read the statement issued by GSK following the detailed list of allegations.
GSK said it believed the alleged fraud only involved a small fraction of the 3bn renminbi figure provided by the Chinese authorities. It also questions whether its staff dealt with hundreds of travel agents as described by the police. GSK’s own inquiry is focusing on its list of 25 approved partners.
Companies and individuals found guilty of economic crimes under Chinese law face serious financial penalties and the claw-back of unlawful gains. Prison sentences are not just reserved for the individuals involved – senior managers are also liable for fines and incarceration.
“I suspect that the Chinese government will now seek some compromises from GSK, in terms of how it operates. Then it is down to GSK to make the decision whether it can play this game or has to cut its losses,” said Dr Kerry Brown, head of China Studies at the University of Sydney.
Beijing is desperate to gain control over what it considers unreasonable drug and vaccine prices at a time when it is trying to guarantee accessible health care for its entire population. GSK and others supply drugs to China which are otherwise unattainable. Unless the government flexes its muscle on pricing, it will be faced with a runaway health-care bill for hospitals that are already overcrowded. The newly installed politburo under Xi Jinping is also on a mission to crack down on corruption in a bid to make a clean break from its predecessor.
Doctors are poorly paid in the country, making them susceptible to payments by pharmaceutical companies and others in a culture where business is built on fostering relationships. “In China the situation is ripe for potential compliance violations,” said Chen. “Business courtesies are common practice and it’s hard to draw a clear line where something becomes an improper business inducement.”
There is a well-known Chinese proverb which advocates “killing the chicken to scare the monkey” – making an example of one to change the behaviour of many.
GSK could well be China’s chicken, though there are tentative signs the investigation will go further as has been threatened. Belgian drug maker UCB admitted it had been visited by Chinese authorities seeking information on compliance last week. A number of other pharmaceutical giants, including AstraZeneca, Roche and Novartis, have said they have not been contacted by investigators.
For now, the spotlight remains firmly on GSK, which faces serious questions over governance at its China business. Resolving those will involve protracted and sensitive negotiations with top officials in Beijing. GSK may also have to endure a lengthy criminal procedure which could result in a hefty financial hit, as well as reputational damage.
But none of this is likely to drive the company away. China is predicted to overtake Japan to become the second-biggest pharmaceuticals market in the world by 2016. The country is also pouring vast sums of money into its life sciences sector.
The fallout from these allegations will be a bitter pill for GSK to swallow. But the company knows it is now time to make amends.
History of a crisis