SHANGHAI – After a 15-month corruption investigation, the verdict for Glaxosmithkline plc in China has been guilty as charged, surprising few industry insiders; it is routine for the government to come out on top in such high-profile cases, while most readily admit there are no saints in China's downstream pharmaceutical business.

"When they [the government] make the decision to prosecute, generally they have a good idea what the outcome will be; otherwise, they won't have gone that route," Kevin Jones, law partner at Faegre Baker Daniels LLP in Shanghai, told BioWorld Asia.

With the guilty verdict a foregone conclusion for some, the threat of jail time, not only of senior Chinese executives, but also of British-born GSK China general manger Mark Reilly, left others waiting with bated breath.

According to Greg Scott, president and founder of Chinabio LLC, the commuted sentence for Reilly and other senior staff must have been a "huge relief for GSK."

For Friedhelm Blobel, the CEO of Sciclone Pharmaceuticals Inc., a company with a strong commercial operation in China, "this outcome sends a strong message about the need for companies to implement, and ensure adherence to, strong, high-quality compliance programs in all aspects of their business."

The trial was held behind closed doors and completed swiftly in Changsha, Hunan province. The detailed decision, announced on Sept. 19, has not been made available on the internet, and, according to Jones, there is a possibility it may not be made public. (See BioWorld Today, Sept. 22, 2014.)

NO JAIL TIME

What is publicly known is that GSK was able to win a suspended sentence of two to four years jail time for its senior employees and Reilly, who will be deported.

That reprieve may in part be due to the public apology GSK made on its website and the company's full cooperation in the investigation.

"If you make an apology, you generally get a more lenient sentence, instead of if you try to fight it," Jones explained. "Last year, there was a 99.9 percent conviction rate for criminal convictions. And, generally, if you want to bring a court case for criminal or commercial cases, before the court will accept it you have to put together evidence to support your case quite well."

The methods of bribery reported in the Chinese media are presumably the evidence used against GSK. Summarized in detail by blogger Michael Whitehead, they include widespread bribery of doctors across divisions and making use of dodgy travel agencies to funnel cash. There also reportedly was systemic tax fraud related to transfer pricing that attributed revenues with the parent company over the China subsidiary.

Peter Humphreys and his wife, Yu Yingzeng, the investigators hired by GSK to look into a related blackmail case, were not so lucky in terms of sentencing. Humphrey was given two and a half years in jail and Yingzeng two years, for what would seem a relatively lesser crime of collecting private information on individuals. (See BioWorld Today, Aug. 13, 2014.)

In the apology letter, GSK also "for the harm caused to individuals who were illegally investigated by GSKCI."

GSKCI stands for GSK China Investment Co. Ltd.

A SIGNIFICANT FINE

GSK was accused of funneling ¥3 billion in bribes – about $500 million, depending on the exchange rate. To put into perspective, it is the same amount GSK has invested in China. According to the company's website, it has spent more than $500 million on 7,000 jobs, factories and R&D for neurodegenerative diseases.

As part of GSK's verdict, the big pharma was ordered to pay a fine of ¥3 billion, or $490 million. GSK said the fine will be paid through existing cash resources, with costs related to restructuring announced in the third quarter report.

Both Jones and Scott called the fine "significant," and the largest corporate fine ever meted out in China.

"For China, it is quite unusual. Usually fines are not of that scale; this is biggest fine ever," Jones noted. "No Chinese company has had to pay such a big fine, nowhere near this amount."

According to the Faegre Baker Daniels database, the next largest corporate fine for a similar violation was ¥5 million, handed down to a Shanghai real estate firm in 2011 for bribes of ¥15 million.

The calculation of fines of that nature in China is not well understood, although the reasoning for GSK getting such a large hit probably has more to do with keeping up with the size of fines imposed by other foreign governments. In a press briefing when the investigation was first announced, the lead investigator cited the $3 billion GSK was fined in the U.S. in 2012 as a wake-up call to the company's culture of bribery.

Chinese news accounts also said the fine was in line with international standards.

Nonetheless, the China fine, while eye-catching and historic as the biggest yet, is expected to be manageable related to the company's cash flow and is unlikely to have a significant impact on the business overall.

ROUND TWO: CHINA BLACKLIST AND THE FCPA

What could hit GSK much harder is the possibility of being blacklisted and excluded from the official tender system, necessary for companies to get their products in hospitals and on reimbursement lists. If blacklisted, the ban would last two years in the province where the bribery occurred and could affect the company's bottom line.

The new blacklist rules came into effect in March and are set out to punish companies that are not only charged, but also under investigation for bribery of state health care institutions and medical personnel. (See BioWorld Asia, Jan. 8, 2014.)

The new rules are considered much tougher than previous sanctions, but to date no companies have been blacklisted even though several investigations have been under way. Jones noted that blacklisting has historically been inconsistently implemented.

It is noteworthy that the GSK apology letter admits to having been found guilty of bribing only nongovernment personnel. That presumably is a defensive measure to avoid not only the consequences of the blacklist, but also consequences relating to alleged violations of the Foreign Corrupt Practices Act (FCPA), for which GSK also is being investigated.

An FCPA violation involves the bribing of government officials or employees of a government entity. In China, hospitals are run by the state and, technically, doctors are considered government officials. That makes China a particularly risky place for foreign pharma companies, and, up until the recent GSK China case, was the main focus of compliance programs.

In reality, Jones said, doctors are the people GSK would have had to bribe to boost sales. Merely indicating it wasn't paying government officials won't protect GSK from U.S. or UK investigations finding otherwise.

THERE ARE NO SAINTS

According to an industry insider, GSK is not the worst offender, and there are no saints.

The rent-seeking actions of poorly paid doctors is largely viewed as a major factor that needs to be addressed to stamp out systemic corruption. But if broken down, beyond the enormity of the bribery at GSK, a few other factors also stand out, making the case unique and unlikely to be replicated.

For example, the trigger of the whole investigation may well have been a human resource blunder, involving the dismissal of an employee with strong government ties. Humphrey's company, Chinawhys, was hired to investigate whomever planted a video camera in GSK China general manager Reilly's home. It later turned out that person was also a company whistleblower.

"I think it was a big mistake on their part to investigate her," Jones said.

NEW ERA OF HEIGHTENED COMPLIANCE

Since the onset of the GSK investigation, foreign companies across the board have been reinvigorating their compliance programs. Always considered important in China, it has now risen to the top of senior executives' to-do lists. It is not expected, however, that the GSK verdict will change that overall trend, as many companies are still starry-eyed about the potential in China's untapped market and there is little talk of pulling out.

"The general sentiment is I don't think people will expect a whole lot more to happen but that the scrutiny will also continue," Chinabio's Scott said. "They are also looking at Chinese companies as well. So I think this was strong shot across the bow, if you will. And an indication that people need to comply, companies will be on their best behavior and follow the rules and regulations."

However, after a lengthy investigation, the authorities now have a much clearer picture of the misdeeds of the pharma industry, and it is unlikely for total compliance amongst the ranks to happen overnight. Given the anticorruption campaign that continues to be the focus of President Xi Jinping's government, if the government wants to go out and collect fines, it can do so.

According to Sciclone's Blobel, "the China government's anticorruption campaign should serve as a strong reminder throughout the pharma industry – multinational as well as local companies – of how critically important it is to have a zero-tolerance policy relative to inappropriate business practices."

In the meantime, Scott said, there may be a bit of a pain for industry as it dots all the i's and crosses its t's from a legal and procedural perspective, and there may be a huge surge in demand for compliance lawyers. But, ultimately, the transparency will be better for the industry as a whole.