Tuesday, July 16, 2013

Sexual Favors Spur Glaxo’s $1.5 Billion China Sales, Police Say

GlaxoSmithKline Plc (GSK)’s sales in China jumped 20 percent to about 1 billion pounds ($1.5 billion) last year, almost quadruple the pace of growth across its emerging markets. Police say bribes and sexual favors spurred the gain.

The drugmaker now faces allegations of economic crimes involving 3 billion yuan ($489 million) of spurious travel and meeting expenses, and trade in sexual favors, the Public Security Ministry said yesterday. The allegations are “shameful” and would be a breach of the company’s systems and values, Glaxo said in a statement.

An employee of GlaxoSmithKline Plc (GSK) enters the company's headquarters in Shanghai. Photographer: Peter Parks/AFP/Getty Images

Bribes paid to hospitals, doctors and health officials to solicit sales helped boost Glaxo’s revenue, according to the ministry, which controls China’s police. If found guilty, Glaxo could be ordered to pay a penalty equating to only a fraction of its sales in China, the world’s fastest-growing major pharmaceutical market, said Fabian Wenner, a health-care analyst for Kepler Capital Markets in Zurich.

“While being involved in criminal offenses and associated with illegal actions is clearly damaging for GSK’s reputation, I doubt that this will be of material impact for the company,” Wenner said in an interview yesterday.

Kepler Capital Markets estimates Glaxo may have to pay $5 million to $10 million to settle the matter, based on fines paid in China for similar violations, “implying close to no impact for the shares,” he said. “I haven’t spoken to any investor who is concerned about this yet.”

Glaxo fell 0.3 percent to close at 1,744.50 pence in London trading yesterday. The stock has risen 31 percent this year, compared with a 17 percent gain in the Bloomberg Europe Pharmaceutical Index.

Pfizer, Lilly

Eli Lilly & Co. (LLY) in December agreed to pay $29.4 million to settle U.S. Securities and Exchange Commission allegations that employees gave cash and gifts to officials in China, BrazilRussiaand Poland to win millions of dollars in business. Pfizer Inc. (PFE), the world’s biggest drugmaker, agreed last August to pay $60.2 million to settle foreign bribery cases it disclosed to U.S. authorities involving alleged payments paid by employees and agents of subsidiaries, including in China.

“As GSK supplies a range of important drugs for public health, we doubt that there will be an enduring impact on its business in China,” wrote Deutsche Bank AG’s London-based analyst Mark Clarkin a June 12 note to clients.

Glaxo and rivals face a potentially greater threat in China from a pricing investigation announced this month by China’s National Development and Reform Commission, the top economic planning agency, Clark said.

Price Cuts

“There have been suggestions that this could result in large price cuts for those products that are available more cheaply in reference countries abroad,” Clark said.

Glaxo’s revenue in China last year equate to about 3.8 percent of the company’s total, Chief Financial Officer Simon Dingemans said in an interview in May. The company’s emerging markets sales grew 5.6 percent in the period to 1.56 billion pounds, according to data compiled by Bloomberg.

Pharmaceuticals sales in China are projected to expand 15-to-18 percent annually through 2016, IMS Institute for Healthcare Informatics said in July last year.

The heritage of GlaxoSmithKline in China dates from 1908, the company said in a 2007 press release. It was one of the first foreign pharmaceutical companies to establish a joint venture in China, with six manufacturing sites there and investment of more than $500 million, according to its website.

“To boost the prices and sales volume of their drugs, the company has taken some illegal actions,” Gao Feng, head of the economic crimes investigations unit at the Public Security Ministry, told reporters in Beijing yesterday. “GSK’s marketing strategy includes many things that allow and even encourage bribery activities.”

The use of kickbacks is a key reason why drug prices are higher in China than they ought to be, Gao said.

Bribing Costs

“GSK takes a large portion of the profits from its drug sales in China to bribe government officials, medical associations, hospitals and doctors,” he said. “Expenses for bribery are ultimately being covered by the public.”

Glaxo will cooperate fully with the Chinese authorities in their investigation and take all necessary action required, the drugmaker said in yesterday’s statement.

“GSK shares the desire of the Chinese authorities to root out corruption,” the company said. “These allegations are shameful and we regret this has occurred.”

Executives Detained

Four senior Glaxo executives -- all Chinese nationals -- have been detained as part of the investigation, Gao said. Enforcement measures haven’t extended to expatriate staff, though “we can’t promise anything,” he said.

Mark Reilly, the head of Glaxo’s China unit, left the country last month after his colleagues were detained, Gao said.

Glaxo’s Singapore-based spokesman Garry Daniels said he couldn’t immediately respond to questions about the whereabouts of Reilly and the investigations in China. The company will issue a statement from London later today, Daniels said.

The drugmaker has been boosting its research and development presence in China. For example, it opened an innovation center to develop consumer drugs, and set up a unit testing botanicals, compounds extracted from herbs used in traditional Chinese medicine, to treat immune disorders.

Those efforts hit a snag last month, when the company announced that it fired its head of Chinese research and development. It was discovered that a paper the scientist helped write for the journal Nature Medicine contained data that had been misrepresented. A second individual resigned and three others were placed on administrative leave pending a final review, and the company requested the paper be retracted.

“If something like the scientific retraction had occurred in the U.S. or Europe, the company involved would just have said that a researcher made an error,” said Greg Scott, founder of Shanghai-based life sciences consultancy ChinaBio LLC, in an e-mail. “But it happened in China, so it affects the perception of the whole country.”

To contact Bloomberg News staff for this story: Daryl Loo in Beijing at dloo7@bloomberg.net

To contact the editor responsible for this story: Jason Gale at j.gale@bloomberg.net


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