* GlaxoSmithKline investigation rocks business community
* Choose compliance over winning business, employees at one
pharma firm told
* Probe will "shake up anyone responsible for compliance" -
* Bribery rife in pharmaceutical industry
By Michael Martina
BEIJING, July 17 A Chinese bribery investigation
into British drugmaker GlaxoSmithKline has sent tremors
through multinational pharmaceutical firms in China, prompting
at least one to review how they do business in the country.
Experts said foreign companies across the spectrum were
watching closely to see what happened to GSK and its four
detained Chinese executives given bribery and business go
hand-in-hand in the world's second biggest economy.
Chinese police on Monday accused GlaxoSmithKline of bribing
officials and doctors to boost sales and raise the price of its
medicines. They said GSK transferred up to 3 billion yuan ($489
million) to 700 travel agencies and consultancies over six years
to facilitate the bribes.
Britain's biggest drug maker said it was deeply concerned by
the developments, which it called "shameful".
On the same day police announced their revelations, senior
managers from another multinational pharmaceutical firm in China
were telling staff to make sure they complied with Chinese
regulations governing the industry, one employee said.
"The message from the top is that if I have to choose
between compliance and winning business, I would rather lose the
business," the employee told Reuters, requesting anonymity
because of the sensitivity of the matter.
Bribes to government officials, underfunded hospitals and
poorly paid doctors have long facilitated the regulatory
approval, distribution and the pricing of medicines in China.
Experts said it was too soon to tell if the GSK
investigation would change such practices.
On top of the police probe, China's National Development and
Reform Commission is examining prices charged by 60 local and
international drugmakers including units of GSK, Merck & Co Inc
and Astellas Pharma Inc.
"All the other players in the industry will be taking a look
at their procedures, whether they face any active investigations
or not," said John McFarland, head of fraud prevention at Hill &
Associates, based in Singapore.
CORPORATE BRIBERY RIFE
The GSK investigation is the highest profile corporate probe
in China since four executives from mining giant Rio Tinto
were jailed in March 2010 for taking bribes and
stealing commercial secrets. Three of those executives were
Chinese while the fourth was a Chinese-born Australian.
Past improper payouts in China have also landed other
Western drugmakers in trouble - although with U.S. rather than
Pfizer Inc and Eli Lilly & Co have both
settled with Washington in the past 11 months over alleged
corrupt payments in foreign markets, including China, and more
cases under the U.S. Foreign Corrupt Practices Act are pending.
China is increasingly important for big drug makers, which
rely on growth in emerging markets to offset slower sales in
Western markets. IMS Health, which tracks pharmaceutical
industry trends, expects China to overtake Japan as the world's
second-biggest drugs market behind the United States by 2016.
Some lawyers in China said corporate bribery was so
widespread that a single action in one industry was unlikely to
halt the practice without sustained enforcement from the
But Richard Cassin, an expert on the U.S. Foreign Corrupt
Practices Act and author of a popular FCPA blog, said China had
drawn a line in the sand for foreign companies.
"The China investigation and detentions of executives of a
giant Western company will shake up anyone responsible for
compliance," he said.
A legal and compliance executive at a major multinational
conglomerate in China said all eyes were on GSK.
"Businesses outside of the sector are really watching this
to see whether this is an isolated circumstance," the executive,
who was not authorized to speak to the media, told Reuters.
When announcing the accusations against GSK, Chinese police
said they had uncovered information that pointed to similar
violations made by other multinational pharmaceutical firms,
although they have not named any companies.
BIG PHARMA AN EASY TARGET
Pharmaceutical companies are at the mercy of Chinese
regulators in getting products licensed for import or
manufacture in China, or to get them listed on the national drug
registry. They typically rely on hired distributors to get their
drugs to market and into hospitals.
State broadcaster CCTV on Tuesday night aired an interview
with one of the detained GSK executives, who said he funnelled
money through travel agencies by arranging conferences, some of
which were never held.
That money was then used to bribe officials, doctors and
medical associations to facilitate sales or drug registrations.
According to sources with knowledge of the industry, China's
sophisticated and thriving market for fake documents also allows
local employees to provide forged paperwork to more senior or
Efforts made by drug firms at compliance training can even
backfire, as some employees learn how to avoid detection.
Politics could also be playing its part in the focus on
foreign drugs companies.
China's government is faced with a $1 trillion healthcare
bill by 2020, according to a report by consultants McKinsey, and
is keen to cut the prices of medicines while at the same time
trying to provide universal access to healthcare.
That has made pharmaceutical companies vulnerable, said
James Zimmerman, managing partner of law firm Sheppard Mullin
Richter & Hampton and a former chairman of the American Chamber
of Commerce in China.
"My take is that the PRC government is targeting the
industry given that cost-effective health care for the masses is
a critical current policy objective for China's aging
population, and the government's legitimacy is at risk if it
fails to deliver on its promise of affordable and accessible
health care," Zimmerman said.