SHANGHAI – Glaxosmithkline plc sent three top global executives to China to deal with an expanding scandal that has seen four executives detained and one confess on national television.
Abbas Hussein, president of global business outside of the U.S. (Europe, Emerging Markets and Asia Pacific Pharmaceuticals) has been tasked with managing the unfolding scandal in China. After meeting with Chinese police late last week, Hussein said Monday that GSK China executives "appear to have acted outside of our processes and controls which breaches Chinese law. We have zero tolerance for any behavior of this nature."
GSK further committed to fully support the Chinese authorities' efforts to reform the medical sector and will "root out corruption wherever it exists." The company intends to look at its business model in China and proposes lowering drug costs to be more affordable for Chinese patients.
GSK's China operations have been operating without a general manager since Mark Reilly left for the UK on July 5 for what were supposed to be routine meetings. He has not yet returned.
The company's vice president of finance for China, Steve Nechelput, has been asked to stay in China and has been barred from international travel by national authorities. GSK said Nechelput is not under investigation and GSK has known about the travel restrictions since late June.
"It is important to note that Nechelput has not been questioned or detained," said a company spokesperson.
GSK is scheduled to announce its annual results on July 24. The controversy in China is likely to figure prominently during the company's conference call.
Authorities in China on June 15 accused GSK of serious "economic crimes" including "commercial bribery and tax-related crimes." Authorities are investigating transactions worth ¥3 billion (US$488 billion) to determine if they were faked. The transactions involved some 700 travel agencies. The Public Security Bureau (PSB) in China said GSK was first notified of the investigation on June 27, but the investigation had been under way for six months.
The four GSK executives detained by police are all Chinese nationals. A GSK spokesperson would not comment on the status of individuals involved in the investigation.
One of the four executives, VP and operations manager Liang Hong, admitted on the national television channel CCTV to the allegations of using travel agencies to fake business expenses, pay bribes and increase drug sales.
"It means he is hoping for leniency in his own case, perhaps a lighter prison sentence or a suspended sentence. It also means the government is collecting first-hand evidence of the alleged fraud and bribery, which can then be used against other defendants, including the company," said Richard Cassin, a lawyer and expert on corruption who also publishes the FCPA Blog.
"The drug company allegedly arranged for payments to doctors and medical officials in exchange for them buying or recommending the drug company's products. The scenario has occurred in other countries, including the U.S. domestic market, where some drug companies have already paid very large fines and penalties," said Cassin.
At first quiet on the affair, the company is now taking some responsibility and addressing the problem: "These allegations are shameful and we regret this has occurred," said GSK in a statement.
In January, China's top judicial authorities issued an updated interpretation on the enforcement of bribery laws and set out specific punishments for certain industries and provided for reduced sentences for suspects who confess. The life sciences industry was singled out.
Corruption Well Documented
A number of systemic factors that make corruption more widespread in China's health care industry are well documented.
These include a fragmented distribution system that leads to large unwieldy sales forces and the low pay of doctors and health officials who supplement their income with benefits provided by drug makers.
Perhaps less well known is that corporate travel agency abuse is also common, although it is easily avoided by bringing travel services in house for closer monitoring.
"You live or work with or in China long enough and travel agencies become somewhat of a joke. They are the 7-11 of business designations, selling anything and everything, including some actual travel services," said Damjan Denoble, a partner at Rubicon Strategy Group who is researching the Foreign Corrupt Practices Act (FCPA) and corruption in China's health care sector.
Many travel agencies in China provide legitimate services but using travel agencies is a common way for employees to circumvent company procedures.
Last year, two other global medical companies, Biomet Inc. and Pfizer Inc. (along with its subsidiary Wyeth LLC), were involved in travel abuses and had to deal with accusations of violating the U.S. Foreign Corrupt Practices Act (FCPA). They paid fines of $22 million and $45 million (Pfizer and Wyeth combined). (See BioWorld Today, Nov. 18, 2011 , and Aug. 8, 2012.)
The SEC said at the time that Pfizer and some of its subsidiaries "had bribery . . . entwined in their sales culture."
On July 11 , China's PSB made a similar statement in a briefing on the GSK investigation, saying that "bribery was part of the company's strategy." Authorities said GSK entered their investigative radar after the US SEC levied fines of $3 billion for FDA violations.