UPDATE 4-GSK says executives appear to have broken Chinese law

Mon Jul 22, 2013 10:22am EDT

* Emerging markets head apologises for bribery scandal

* GSK promises changes to bring down China drug prices

* AstraZeneca also visited by Chinese police

* GSK forced to drop scheme to raise stake in Nigerian unit

By Ben Hirschler and Kazunori Takada

LONDON/SHANGHAI, July 22 (Reuters) - British drugmaker GlaxoSmithKline said on Monday some of its executives in China appeared to have broken the law in a bribery scandal, as it promised changes in its business model that would lower the cost of medicine in the country.

GSK is the latest in a string of multinationals to be targeted by Chinese authorities over alleged corruption, price-fixing and quality controls.

Chinese police visited the Shanghai office of another British drugmaker, AstraZeneca, a company spokeswoman said on Monday. They arrived on Friday and took away a sales representative for questioning, she said.

Health Minister Li Bin maintained the pressure on the drugs industry by stating that her department would place people and companies guilty of bribery on a black list and punish them.

GSK's head of emerging markets, Abbas Hussain, said his company had zero tolerance for employees who broke the law.

"Certain senior executives of GSK China, who know our systems well, appear to have acted outside of our processes and controls, which breaches Chinese law," he said in a statement.

Hussain, sent to China last week to lead GSK's response to the crisis, held a meeting with the Ministry of Public Security at which he also promised to review GSK's business model.

"Savings made as a result of proposed changes to our operational model will be passed on in the form of price reductions, ensuring our medicines are more affordable to Chinese patients," Hussain added.

Britain's biggest drugmaker gave no details on the changes or the extent of price cuts - but the move addresses a key issue for Beijing, which launched a probe into pricing at 60 local and international drug firms earlier this month.

GSK supplies key products such as vaccines in China, as well as drugs for lung disease and cancer.

Chinese police, who have detained four Chinese executives from GSK, last week accused the firm of bribing officials and doctors to boost sales and raise drug prices by funnelling up to 3 billion yuan ($489 million) to travel agencies.

GSK has called the allegations "shameful".

Last week, Chinese officials also visited the Shanghai office of Belgian drugmaker UCB. The latest visit to AstraZeneca shows authorities are spreading the net, although AstraZeneca described the case as a local police matter.

"We believe that this investigation relates to an individual case and while we have not yet received an update from the Public Security Bureau, we have no reason to believe it's related to any other investigations," the spokeswoman said.

CHIEF EXECUTIVE TO SPEAK ON WEDNESDAY

In a statement, China's Ministry of Public Security said GSK's Hussain, who was dispatched to China last week by CEO Andrew Witty, apologised for the scandal during the meeting.

Witty will detail what action the drugmaker is taking in response to the bribery allegations when he presents quarterly results on Wednesday, sources said.

GSK's intention to cut the price of its medicines in China would be in line with how other foreign companies have responded to pressure from Beijing.

European food groups Nestle and Danone said they would cut infant milk formula prices in China after Beijing launched an inquiry into the industry.

"In China, when the government criticises people, they tend to bow down and apologise very quickly because they are scared of the authority of the central government to do tremendous harm to their business - whether it be for arresting executives very quickly or through auditing," said Shaun Rein, managing director of the Shanghai-based China Market Research Group.

Separately, GSK had a setback in another important emerging market on Monday when it abandoned a scheme to increase its stake in GSK Consumer Nigeria, its consumer healthcare business in the country, following opposition from minority shareholders.

CULTURE OF PAYMENTS

China has long been known for a culture in which drug companies make payments to doctors, since physicians rely on rewards for writing prescriptions to offset meagre salaries.

Those practices, however, are increasingly at odds with a crackdown on corruption under President Xi Jinping, leaving companies struggling to toe the line while not losing business in a highly competitive market.

Chinese state media has aired interviews with one of the detained GSK executives who has said travel agencies were used to arrange conferences, some of which were never held, to allocate money that could then be used for bribes.

One of the agencies at the centre of the scandal has been identified by state media as Shanghai Linjiang International Travel Agency.

The New York Times said documents it obtained showed that in the last three years at least six other global pharmaceutical firms, including Merck, Novartis, Roche and Sanofi, had used that agency to make arrangements for events and conferences.

Roche, Merck and Sanofi told Reuters they had used the Linjiang agency in the past. Novartis had no immediate comment.

The travel agency's business has now been suspended, China's official Xinhua news agency reported last Thursday.