Four Drugmakers Face China Probes as Glaxo Woes Widen; GSK is test case in China’s rules laboratory

Four Drugmakers Face China Probes as Glaxo Woes Widen

China is investigating at least four multinational drugmakers as it widens its probe of GlaxoSmithKline Plc (GSK), according to a lawyer in Hong Kong whose firm advises companies on cross-border anti-corruption.

The investigations point to an increased targeting of the pharmaceutical industry in corruption probes as the world’s most populous country faces rising health-care costs and seeks to lower drug prices. While the drugmakers are being examined by local regulators, the results may draw added questions from officials in Beijing and scrutiny by the U.S. government under the Foreign Corrupt Practices Act.“We are aware of four pharmaceutical companies who are facing” investigation by local anti-corruption units, said the lawyer, Wendy Wysong, the head of anti-corruption practice in Asia-Pacific at law firm Clifford Chance. Wysong declined to identify the companies. Yesterday, Chinese officials said Glaxo used travel agencies as a conduit for bribes, that company executives received “sexual bribes,” and that other drugmakers have transferred money to the agencies.

“As to whether these companies are also involved in illegal dealings, you can go and ask them,” said Gao Feng, head of the economic crimes investigations unit at China’s Public Security Ministry. “Of course they won’t answer. But you can ask them one question: ‘Can you sleep well at night?’”

Gao didn’t identify the other companies linked financially to the travel agencies at a news conference yesterday. His comments were unusual, given that Chinese police rarely speak publicly to foreign media about ongoing investigations. The Glaxo case, Gao said, included bribes that went to “government officials, medical associations, hospitals and doctors.”

Drugmaker Target

China, the world’s fastest-growing market for medicines, has become an important target for the pharmaceutical industry as more and more best-selling therapies have gone off patent.

Glaxo’s revenue from China increased 17 percent last year to 759 million pounds ($1.1 billion), while product sales for London-based AstraZeneca rose 20 percent in China to $1.5 billion. Pfizer Inc. and Merck & Co., the two biggest U.S. drugmakers, together employ about 14,000 people in China. AstraZeneca, Pfizer and Merck haven’t been identified by China as targets of their probe.

Glaxo said in an e-mailed statement it is “deeply concerned and disappointed” and will stop using agencies identified in the probe. The drugmaker is reviewing all third-party agency relationships and will cooperate with Chinese authorities, according to the statement.

U.S. Act

The U.S. Foreign Corrupt Practices Act bars corporate employees or their agents from paying bribes to government officials to obtain or retain business or to secure an improper advantage. Glaxo is among several drugmakers that have already been contacted by U.S. authorities in an ongoing industrywide probe into possible violations of the act. That Glaxo probe, begun in 2010, covers practices in countries that include China, according to the company’s 2012 annual report.

AstraZeneca, in its 2012 annual report, also said it is investigating indications of inappropriate conduct in countries that include China. The company said it received inquiries from U.S. authorities related to “among other things, sales practices, internal controls, certain distributors and interactions with health-care providers and other government officials in several countries.”

“This is an ongoing matter and AstraZeneca is co-operating with the inquiries,” Esra Erkal-Paler, a spokeswoman for London-based AstraZeneca said in an e-mail, referring to the U.S. inquiry. “We have no update to provide at this time.”

China President

In China, President Xi Jinping has vowed to combat official corruption since becoming head of the Communist Party in November. At the same time the country has been moving aggressively to get drugmakers to lower prices as it prepares to widen health coverage, with the top economic planning agency probing the costs and prices of 60 drugmakers including Glaxo, Merck, Novartis AG and Baxter International Inc.

Foreign drugmakers in regular contact with Chinese officials overseeing the health system are an obvious target for anti-corruption probes, said Willy Wo-Lap Lam, an adjunct professor at the Chinese University of Hong Kong who studies the politics of that country.

“The medical system is a disaster zone when it comes to high-level corruption,” Lam said in a telephone interview. “Since they instituted the anti-corruption campaign, areas of abuse within the medical system could be targets.”

Regulatory Agencies

In China, every province and city have local agencies that regulate commercial activity. These units, formally known as the Administration for Industry and Commerce, or AIC, hold broad powers to investigate possible malfeasance, seize evidence and impose financial penalties without a warrant, according to a note from consulting firm Control Risks. They also have the authority to order the disgorgement of profits earned through unfair commercial practices.

In some cases, if a company operates in more than one community, a probe can begin in one jurisdiction and spread to others, with the different AIC branches exchanging information, said Wysong, who wasn’t commenting specifically on Glaxo.

Finding by these local agencies could trigger further scrutiny under the U.S. foreign practices act, said Sam Williamson, a partner who specializes in anti-corruption law at the Shanghai offices of Kirkland & Ellis LLP.

The settlement of AIC corruption charges “could have significant implications back in the U.S.,” said Williamson, a former U.S. prosecutor. The Justice Department is “familiar with the AICs and often ask companies questions about this — for example what AIC investigations a company has had and how did they play out.”

‘Most Shocked’

China may also take its cues from the U.S. At yesterday’s press conference, the Chinese investigator Gao mentioned Glaxo’s 2011 agreement to pay $3 billion to settle U.S. claims the company marketed drugs for unapproved uses and other matters.

“We were most shocked” by the settlement, Gao said. “At the time, we were very puzzled as to what actually happened at the company and, through our investigations, we have found the answer.”

Whistle-blowers can also drive investigations by anti-corruption agencies, said Kelly Austin, partner-in-charge of the Hong Kong offices of law firm Gibson, Dunn & Crutcher.

“Sometimes they’re started by a whistle-blower, sometimes by a disgruntled competitor, and sometimes it can be a result of their own enforcement action,” Austin said in an interview.

Police Investigation

The Glaxo probe is a result of police investigations, not a whistle-blower’s complaint, Gao said at the press conference.

Half of all the overseas bribery cases settled last year involved activity conducted in Asia Pacific, according to the U.S. Securities and Exchange Commission’s website.

Glaxo’s troubles in China began surfacing last month. The company spent four months investigating a whistleblower’s claims of corruption and bribery at its China business. Glaxo said that it found no evidence of wrongdoing. That same week, Glaxo fired its head of Chinese research and development after finding that a paper he helped write for a medical journal contained data that had been misrepresented, according to the company.

A police investigation followed. China detained four senior Glaxo executives on suspicion of economic crimes involving 3 billion yuan ($489 million) of spurious travel and meeting expenses, and receiving sexual favors.

The alleged offenses date to 2007 and involved 700 travel agencies, Gao said at yesterday’s briefing. The ministry has been handling the Glaxo case for more than half a year following police investigations, Gao said.

China’s probe of drugmakers will probably continue to expand, said Lam of the Chinese University of Hong Kong.

“We are only at the beginning of an anti-corruption campaign which will last for at least one year,” Lam said.

–Natasha Khan and Daryl Loo, With assistance from David Voreacos in Newark and Drew Armstrong and Greg Farrell in New York. Editors: Kristen Hallam, Reg Gale

To contact the reporter on this story: Kristen Hallam in London at khallam@bloomberg.net

July 15, 2013 5:36 pm

GSK is test case in China’s rules laboratory

By Leslie Hook in Beijing and Andrew Jack in London

Hundreds of millions of dollars of allegedly improper payments under review by the Chinese police. Evidence of sexual favours allegedly being exchanged as part of an elaborate scheme to boost sales and profits in the world’s fastest-growing drug market. It was not what GlaxoSmithKline, the UK pharmaceuticals group, which has been rebuilding its image following past scandals, wanted to hear.

Gao Feng, the head of the economic crimes investigation unit at the Ministry of Public Security, said on Monday that GSK had used travel agencies as conduits to pass bribes to government officials, doctors, hospitals and industry associations. He said the travel companies acted as accomplices, with GSK being the “ringleader”.

The probe represents China’s highest-profile bribery investigation of a foreign company since anti-bribery rules came into effect in 2011 and 2013, making it a major test of how the new rules are applied.

The case is also revealing with regard to the complex, and sometimes perverse, incentives that governChina’s healthcare system

. Pharmaceutical executives and analysts say payments to doctors by drug companies, while illegal, are extremely common in China.

“Giving kickbacks to doctors is standard practice in China for pharma companies,” said Shaun Rein, head of consultancy at China Market Research. “Most doctors only make Rmb5,000 or Rmb6,000 [$812 or $974] a month in salary, but they are making hundreds of thousands of dollars a year in kickbacks.”

Police said the investigation of GSK centred on more than Rmb3bn in payments made between GSK and more than 700 travel companies and consultancies in China.

Vowing to co-operate fully with Chinese authorities, GSK said it would “take all necessary action required by the outcome of this investigation”.

Chinese regulators are becoming increasingly assertive, and lawyers say that the aggressive application of anti-bribery legislation fits a pattern as the regulators start to flex their muscles on the global stage. Chinese antitrust authorities recently began a pricing probe ofinfant formula sold in China, and have previously used their influence to enforce major changes in global acquisitions involving non-Chinese companies.

Mr Gao, who is the chief investigator on the case, denied GSK was being singled out because it was foreign. “Bribery is a serious crime which is not tolerated internationally,” he said on Monday. “The Chinese government welcomes all law-abiding companies to invest in China, and we also protect their rights according to Chinese law. But we absolutely won’t allow them to break Chinese law.”

Pfizer, AstraZeneca and Sanofi are among the western drug companies generating the greatest sales in China, but others including GSK are not far behind.

The Chinese government welcomes all law-abiding companies to invest in China . . . but we absolutely won’t allow them to break Chinese law

– Gao Feng, Ministry of Public Security

GSK has been a major investor in the Chinese market, spending Rmb1bn there during the past two decades and setting up a large research facility in Shanghai in 2007. The company’s China businesses sell everything from denture cleaner to Botox to hepatitis vaccines.

While industrialised markets have been stagnating, China has been growing fast over the past decade as a market for medicines, both from “out of pocket” payments by a growing middle class and government-reimbursed healthcare for an expanding share of the population. China is already the world’s third-largest drug market, and expected to be worth $370bn by 2020.

The growth has led to a rapid expansion in the recruitment of thousands of local sales representatives by the companies, who seek to persuade doctors to push their products.

Several groups have already been singled out for prosecutions as a result of aggressive marketing by these staff, with large fines imposed by the US authorities last year on Pfizer and Eli Lilly. GSK in 2012 fired a number of Chinese staff for expenses manipulation and related abuses.

Mark Clark, pharmaceutical analyst at Deutsche Bank, said he considered theChinese authorities’ recent renewed focus on drug pricing was likely to have more impact than the specific GSK bribery probe.

He stressed that GSK’s strategically important portfolio of drugs and vaccines sold in China meant it was unlikely that the company would lose much market share, and more generally the country still only accounted for less than 3 per cent of large western drug companies’ earnings per share.

However, with the US and the UK both potentially adding their own penalties to any local fines imposed by third countries, the bills for companies found guilty of bribery could be set to rise.

Equally, the reputational impact is considerable, particularly for a company such as GSK, which has spent several years under Sir Andrew Witty, chief executive, seeking to improve its image.

In 2011 GSK reached a record $3bn settlement in principle with the US government over aggressive sales and marketing practices in relation to blockbuster medicines.

The latest allegations “will impact the company’s image in China”, said Xu Lingni, pharmaceutical analyst at consultancy CIConsulting.

Updated July 15, 2013, 7:46 p.m. ET

China Targets Big Pharma

GlaxoSmithKline Hit With Bribery Allegations as Health-Care Sector Soars

LAURIE BURKITT and JEANNE WHALEN

BEIJING—China unveiled a litany of bribery and misconduct allegations againstGlaxoSmithKline

GSK.LN -0.26% PLC, a move that industry experts said could presage a broader crackdown in a lucrative market for pharmaceutical and medical companies.

At a news conference on Monday, officials within the Ministry of Public Security’s economic crime investigation unit said four high-level Chinese Glaxo executives have been detained over allegations that they “severely violated” Chinese law. The officials accused Glaxo staffers of using travel agencies as vehicles to bribe government officials, hospitals and doctors in order to sell more drugs at higher prices.

“A large part of their strategy for sales and marketing has been to conspire and encourage the possibility of commercial bribery,” said Gao Feng, a ministry official spearheading the probe of the U.K. pharmaceutical company.

Mr. Gao said Glaxo and the travel agencies exchanged three billion Chinese yuan ($489 million) between them since 2007. Mr. Gao didn’t make clear whether any of that money was used for legitimate business purposes. He alleged that the travel agencies also offered what he called sexual bribes to senior Glaxo executives to keep the company’s business.

In a statement Monday, Glaxo said it is deeply “concerned and disappointed by these serious allegations of fraudulent behavior and ethical misconduct.” It added that “GSK has zero tolerance for any behaviour of this nature” and that the alleged behavior would be a breach of the company’s standards.

Health care is a fast-growing business in China, where increasingly affluent consumers demand better care and the government is under public pressure to widen a traditionally skimpy social safety net. China’s health-care spending is poised to triple to $1 trillion by 2020, according to McKinsey & Co. Sales of pharmaceuticals in China reached $82 billion in 2012, up 18.2% from a year earlier, according to risk-assessment firm Business Monitor International.

Yet industry insiders say that China’s health-care sector is mired in systemic corruption. Many medical companies operate through intermediaries to reach more corners of a diffuse market, while doctors often look to buffer low salaries with perks. “Corruption is widely seen as a major impediment to government health-care reform initiatives in China,” said Hong Kong-based health-care expert Jason Mann, managing director of investment firm Konus Capital. He added that further crackdowns are likely and will be publicized to push forward greater reform.

Western antibribery advocates tend to view China’s anticorruption campaigns skeptically. The country in recent years has created laws aimed at targeting corporate bribery in the wake of a global crackdown on overseas corporate corruption. But Chinese officials have launched few widespread investigations that have resulted in negative outcomes for companies, according to Mike Koehler, a law professor at Southern Illinois University.

One prominent exception: In 2010, a Chinese court handed down a 10-year prison sentence to an Australian employee of the mining company Rio Tinto RIO.LN +0.27%PLC, finding him guilty of accepting around $935,000 in bribes from steelmakers and stealing commercial secrets that undermined China’s steel industry. The employee admitted he accepted bribes on two occasions from steelmakers.

China’s allegations against Glaxo stem from an investigation that publicly kicked off in late June, when law-enforcement officials visited several Glaxo offices, seizing documents and detaining some employees. The high-profile investigation has hit Glaxo in one of its most important and fastest-growing markets, where it has more than 5,000 employees and half a dozen factories and research labs.

Glaxo said in its statement it will cooperate with Chinese authorities in the investigation and is reviewing its third-party agency relationships. It also said Glaxo has stopped using travel agencies identified in the investigation and is conducting a thorough review of historic travel-agency transactions, adding that the company respects Chinese law and expects all staff to abide by it.

Mr. Gao said that Glaxo’s China chief left the country in late June, as officials began reporting details of their investigation.

According to a person familiar with the matter, Glaxo’s top executive in China, general manager Mark Reilly, left the country in early July for London and is currently working in the company’s London offices. This person described Mr. Reilly’s travel as a routine business trip.

Mr. Reilly was in Glaxo’s China offices when officials from the Ministry of Public Security first visited in late June to collect documents at the start of their investigation, this person said. Mr. Reilly wasn’t questioned or detained, the person added. Chinese investigators visited several Glaxo offices, including those in Beijing, Shanghai and Changsha. Mr. Reilly couldn’t be reached to comment Monday.

Glaxo’s sales in China last year exceeded £800 million ($1.2 billion), representing a fairly modest 3% of the company’s global sales of £26.4 billion. But like most pharmaceutical companies, Glaxo is counting on China and other emerging markets to drive future revenue growth as sales in the U.S. and Europe stagnate or decline. While Glaxo’s pharmaceutical and vaccine revenue last year fell by 7% in Europe, to £5 billion, and by 2% in the U.S., to £7 billion, it rose by 17% in China, to £759 million.

At the Chinese ministry’s briefing, Mr. Gao signaled further scrutiny of foreign businesses in China. “No one has asked foreign companies to be a moral model, but they have to serve as good examples,” he said.

When asked how many foreign companies are likely suspects for bribery in China, Mr. Gao said he couldn’t answer, but added, “you will have to ask them only one question: Do you sleep well at night?”

Pharmaceutical companies say that they have in place anticorruption policies and procedures to maintain public trust. Pfizer Inc., PFE -0.07% the largest pharmaceutical company by market share in China, according to health-care information provider IMS Health, said in a company statement, “Corporate integrity is an absolute priority for Pfizer.”

U.S. authorities also have stepped up their scrutiny of multinational companies’ activities in China. Since 2010, the Justice Department and the Securities and Exchange Commission have been investigating whether a number of pharmaceutical makers, including Glaxo, violated the Foreign Corrupt Practices Act, or FCPA, by paying bribes to government officials in more than half a dozen countries, including China. Under the FCPA, doctors and other employees of government-run hospitals are considered government officials. Glaxo and the other companies say they are cooperating with the U.S. investigation.

Meanwhile, Glaxo itself has been investigating allegations from an anonymous tipster that its China-based sales staff was involved in widespread bribery of doctors to prescribe drugs, in some cases for unauthorized uses, between 2004 and 2010. A Glaxo spokesman in June said the company is investigating the allegations.

On Monday, Chinese officials gave further details of their current Glaxo investigation to local state-run media outlets. China’s official Xinhua News Agency reported that detained executives include Liang Hong, Glaxo’s China vice president and operations manager; Zhao Hongyan, a legal-affairs director for the company; Zhang Guowei, a human-resources director; and Huang Hong, a business-development manager.

The detained executives couldn’t be reached for comment. Phones rang unanswered at the company’s offices in the cities of Beijing, Shanghai, Chongqing and Guangzhou.