Allegations of bribes, sexual favors, and inflated seminar expenses swirl around GSK as news of China’s high level police investigation continues to unfold on a daily basis.  Four Chinese GSK executives have been arrested, one is being barred from leaving the country and the most recent reports indicate that up to six other big pharma companies are about to be taken down.  Although the situation looks bad for GSK, the burgeoning Chinese bribery scandal will  most likely ensnare other pharma companies sometime soon.

Background

As we have been reporting in recent posts titled Enemy at the Gates: Bribery Charges In China Getting Worse For GSK and GSK’s China Employees “Confess” To Bribery, the UK drug maker finds itself in perhaps the most serious foreign corruption probe of any company in years.   The details emerging in almost daily articles in the Wall Street Journal, New York Times, Reuters and others paint an unflattering portrait of how GSK funneled about $490 million through travel agencies for several years to pay Chinese physicians for prescriptions business. Chinese police have alleged that GSK officials built a network of 700 travel agencies to channel the funds to “government officials, medical associations, hospitals, and doctors.”  The alleged activity involving GSK, and which began in 2007 and took off in 2010, has been under investigation by Chinese police for more than six months following a raid on Shanghai based Linjiang International Travel Agency.  Although news reports covering the scandal in the past two weeks are mind-spinning in number and content, here are just some of the highlights:

  • Gao Feng, the head of the Economic Crimes Unit of the Chinese Ministry of Public Security, in describing the more than 700 travel agencies and consultants allegedly employed in a bribery scheme that included “financial” and “sexual” kickbacks, stated that “It is like a criminal organization, there is always a boss. In this game, GSK is the godfather.”
  • Liang Hong, GSK’s Vice President of Operations and one of the GSK Chinese executives arrested in the probe, admitted on Chinese television that GSK had paid bribes and stated “[h]aving spent time over the past couple of days, I think the money we spent to run our business was too much.” He went on to add, “The money we spent running the business accounted for 20-30 percent of the drug price.”
  • Steve Nechelput, GSK’s head of finance in China, though not under arrest, was barred from leaving the country pending further investigation of the bribery scheme.
  • A confidential November, 2011 GSK document obtained by the New York Times suggests that GSK’s clinical trial research center in Shanghai may have failed to report results of animal studies in drugs being tested in humans – a serious ethical breach – suggesting that clinical trials may not have been properly monitored and that payments made to hospitals could be construed as bribery

And we could go on, but we won’t.  Suffice to say that most of GSK’s troubles still lie ahead . . . and GSK will most likely have company.  Up to six other international pharmaceutical manufacturers, including Astra Zeneca, UBS, Merck, Novartis, Sanofi and Roche are also being investigated by Chinese officials on similar bribery charges, according to industry insiders, although other than AZ and UBS, no specific companies have been specifically identified as meeting with Chinese investigators.

Unfortunately for GSK, details of the bribery allegations follow closely on the heels of an internal whistleblower investigation.   Although GSK initially stated that its internal investigation of the whistleblower’s allegations found “no evidence of bribery or corruption,” since the Chinese have gone public with their investigation, the Company has tacked course and has all but conceded that its executives in China broke the law.  “Certain senior executives of GSK China, who knew our systems well, appear to have acted outside of our processes and controls, which breaches Chinese law,” said Abbas Hussain, GSK’s head of emerging markets and who has since departed for China so the Company can get a handle on the situation and meet with Chinese officials.  In an official statement, GSK said in part: “We are deeply concerned and disappointed by these serious allegations of fraudulent behaviour and ethical misconduct by certain individuals at the company and third-party agencies.  Such behaviour would be a clear breach of GSK’s systems, governance procedures, values and standards. GSK has zero tolerance for any behaviour of this nature.”  Immediate remedial action being taken by GSK includes an analysis of all third party agency relationships, as well as a review of compliance procedures in China. Click on the link to read the GSK response to the China investigation.   In addition, we learned yesterday that GSK has retained Ropes & Gray to investigate the allegations.

Observations

With national healthcare expenses expected to reach $1 trillion annually by the end of the decade, China is looking for ways to reduce costs.  The country’s National Development and Reform Commission has targeted the drug pricing policies of GSK, Merck, Novartis, Baxter, Astellas Pharma and almost 60 other international drug manufacturers for investigation.  In an apparent effort to stem the tide of the investigation and “play nice” with Chinese investigators, GSK’s Hussain has promised a review of GSK’s “operational model” which he maintained will result in drug price reductions that will make GSK’s drugs more affordable to Chinese patients.  Growing drug costs in China thus appear to have provided the Chinese government with the motivation to institute and “go public” with the GSK investigation, as well widening the probe into other pharmaceutical companies.

Although multinational pharmaceutical companies have determined that China’s nearly 1.4 billion population is too large and too lucrative a market to resist, the country is the perfect metaphor for the proverbial “rock and a hard place.”  Even if drug companies can appease the Chinese government with price reductions for their products, they will all still find themselves in the same predicament when the dust settles.  Chinese physicians will still be underpaid and undoubtedly will still expect something “extra” from a drug company to ensure that his/her prescriptions are written for that company’s products.  Unless the Chinese government is willing to investigate, prosecute and jail its doctors for following centuries of Chinese custom — a custom we can all be sure won’t be abandoned by some Chinese government officials — pharmaceutical companies will face a virtual Hobson’s choice: pay a little “extra” even if it means risking investigation, prosecution, fines and further drug price reductions or refuse to pay and go out of business.  Maybe that’s the kind of choice the Chinese government had in mind all along.  Hmm . . . and then there’s those prosecutors responsible for enforcing the U.S. Foreign Corrupt Practices Act (FCPA) and U.K. Bribery Act . . . we should expect to see them get active really soon too.