Pink Sheet Daily
July 11, 2013
Executive Summary
After weeks of silence on allegations of bribery at GSK, China’s Ministry Of Public Security now claims it has collected evidence of illegal activity. Several GSK executives have been arrested after acknowledging their guilt to police, according to the ministry.
China operations are becoming a big headache for GlaxoSmithKline PLC’s CEO Andrew Witty, not because growth is not fast enough, but due to compliance issues that could lead to criminal charges for its China operations and in-country employees.
China’s Ministry Of Public Security issued a statement on its website July 11 that said it had gathered sufficient evidence in a preliminary investigation against high-level executives at GlaxoSmithKline (China) Investment Co. Ltd. allegedly involved in commercial bribery and tax-related crimes in China.
According to the statement, the public security ministry recently investigated GSK facilities in Changsha, Shanghai and Zhengzhou. The ministry took “criminal compulsory measures” to arrest suspects. After an initial interrogation, the suspects confessed to the crimes, according to the ministry.
The ministry said it found that GSK employees had bribed government officials, industry associations, health care funds, hospitals, and doctors via direct bribery or sponsored projects to expand drug sales channels and raise drug prices.
The investigation determined GSK employees used travel agencies to falsify invoices and at the same time accepted kickbacks from travel agencies.
The public security ministry described the case as “a vile crime involving a huge amount of money, a large number of personnel and a long duration of criminal activity,” and noted that further investigation is ongoing.
When asked for comment, a GSK spokesman sent the following statement: “We are aware of the statement from the PSB [Public Security Bureau]. We are willing to cooperate with the authorities in this inquiry. But this is the first official communication that has been published by the PSB in relation to the specific nature of its investigation.”
“We take all allegations of bribery and corruption seriously,” GSK said. “We continuously monitor our businesses to ensure they meet our strict compliance procedures – we have done this in China and found no evidence of bribery or corruption of doctors or government officials. However, if evidence of such activity is provided we will act swiftly on it.”
The latest development is another in a series of recent blows to GSK in China.
The bribery case comes to light shortly after employees at GSK’s China R&D facility were accused of misrepresenting data in an article published in Nature Medicine, which led to the dismissal of GSK’s head of R&D in China.
According to a July 7 report in the Wall Street Journal, GSK is also investigating whistleblower allegations that its China sales staff bribed doctors to prescribe Botox (onabotulinumtoxinA), which GSK markets in China under a deal with Allergan Inc.
Possible Punishment
GSK and its employees may be involved in several crimes defined by China’s Criminal Law:
1. Offering bribes to a state official [Article 389];
2. Offering bribes to an entity [Article 391];
3. Falsifying special invoices for value-added tax [Article 205];
4. Falsifying invoices [8th Amendment of criminal law, Article 205]; and
5. Employee of a company or enterprise accepting bribes [Article 163].
For offering bribes, companies can be subject to fines while employees can face 10 years imprisonment, or life imprisonment in the most serious cases.
For tax-related violations, companies can be fined while employees can face fixed-term imprisonment between two and seven years, as well as fines in serious cases.
For accepting bribes, company employees can face up to five years of fixed-term imprisonment, or fixed-term imprisonment of at least five years for large bribe amounts.
Time To Check Compliance In China?
China’s government has made public its desire to take action against pharma companies for bribery violations, which is considered a widespread problem in the country.
Compliance is complicated by several factors, such as high employee turnover among pharma companies, which impacts proper training of China sales teams. In addition, Chinese doctors are paid much lower salaries compared to Western peers, which helps fuel demands for kickbacks and leads to corruption.
For multinational pharma companies, the stakes are even higher as most Chinese physicians work at public hospitals and are considered government employees. That means big pharma can also run afoul of Western anti-bribery laws such as the U.S. Foreign Corrupt Practices Act (FCPA) or the U.K. Bribery Act.
In the U.S., Eli Lilly & Co., Johnson & Johnson and Pfizer Inc. have already settled FCPA allegations in emerging markets – which included China in the cases of Lilly and Pfizer – with settlements of $29.4 million, $70 million and $60 million respectively. And more settlements are likely as a slew of companies, including Merck & Co. Inc. and Bristol-Myers Squibb Co., have disclosed they are under investigation for alleged FCPA violations.
In 2010, GSK disclosed that it, too, was under FCPA investigation, saying it had received letters from the U.S. Securities and Exchange Commission and Department of Justice about activities in several unidentified countries as “part of a broader review of pharmaceutical industry practices in countries outside the USA.”
As new national leaders take the stage in China, the government appears to be tightening supervision of business activities. Recently, China’s National Development and Reform Commission (NDRC) investigated several baby formula manufacturers for price-fixing. The companies, including Abbott Laboratories Inc., Nestle SA, Mead Johnson Nutrition Co. and Danone, may face fines from NDRC. The investigations also led the companies to quickly revisit their compliance and pricing policies for China.
It remains to be seen what punishment Chinese authorities have in store for multinational pharma companies found guilty of bribery charges. The GSK case appears to be the first time the public security ministry has investigated a multinational pharma company for bribery. Bribery charges are already considered very serious for domestic companies, but without the added threat of FCPA action.
Executive Summary
After weeks of silence on allegations of bribery at GSK, China’s Ministry Of Public Security now claims it has collected evidence of illegal activity. Several GSK executives have been arrested after acknowledging their guilt to police, according to the ministry.
China operations are becoming a big headache for GlaxoSmithKline PLC’s CEO Andrew Witty, not because growth is not fast enough, but due to compliance issues that could lead to criminal charges for its China operations and in-country employees.
China’s Ministry Of Public Security issued a statement on its website July 11 that said it had gathered sufficient evidence in a preliminary investigation against high-level executives at GlaxoSmithKline (China) Investment Co. Ltd. allegedly involved in commercial bribery and tax-related crimes in China.
According to the statement, the public security ministry recently investigated GSK facilities in Changsha, Shanghai and Zhengzhou. The ministry took “criminal compulsory measures” to arrest suspects. After an initial interrogation, the suspects confessed to the crimes, according to the ministry.
The ministry said it found that GSK employees had bribed government officials, industry associations, health care funds, hospitals, and doctors via direct bribery or sponsored projects to expand drug sales channels and raise drug prices.
The investigation determined GSK employees used travel agencies to falsify invoices and at the same time accepted kickbacks from travel agencies.
The public security ministry described the case as “a vile crime involving a huge amount of money, a large number of personnel and a long duration of criminal activity,” and noted that further investigation is ongoing.
When asked for comment, a GSK spokesman sent the following statement: “We are aware of the statement from the PSB [Public Security Bureau]. We are willing to cooperate with the authorities in this inquiry. But this is the first official communication that has been published by the PSB in relation to the specific nature of its investigation.”
“We take all allegations of bribery and corruption seriously,” GSK said. “We continuously monitor our businesses to ensure they meet our strict compliance procedures – we have done this in China and found no evidence of bribery or corruption of doctors or government officials. However, if evidence of such activity is provided we will act swiftly on it.”
The latest development is another in a series of recent blows to GSK in China.
The bribery case comes to light shortly after employees at GSK’s China R&D facility were accused of misrepresenting data in an article published in Nature Medicine, which led to the dismissal of GSK’s head of R&D in China.
According to a July 7 report in the Wall Street Journal, GSK is also investigating whistleblower allegations that its China sales staff bribed doctors to prescribe Botox (onabotulinumtoxinA), which GSK markets in China under a deal with Allergan Inc.
Possible Punishment
GSK and its employees may be involved in several crimes defined by China’s Criminal Law:
1. Offering bribes to a state official [Article 389];
2. Offering bribes to an entity [Article 391];
3. Falsifying special invoices for value-added tax [Article 205];
4. Falsifying invoices [8th Amendment of criminal law, Article 205]; and
5. Employee of a company or enterprise accepting bribes [Article 163].
For offering bribes, companies can be subject to fines while employees can face 10 years imprisonment, or life imprisonment in the most serious cases.
For tax-related violations, companies can be fined while employees can face fixed-term imprisonment between two and seven years, as well as fines in serious cases.
For accepting bribes, company employees can face up to five years of fixed-term imprisonment, or fixed-term imprisonment of at least five years for large bribe amounts.
Time To Check Compliance In China?
China’s government has made public its desire to take action against pharma companies for bribery violations, which is considered a widespread problem in the country.
Compliance is complicated by several factors, such as high employee turnover among pharma companies, which impacts proper training of China sales teams. In addition, Chinese doctors are paid much lower salaries compared to Western peers, which helps fuel demands for kickbacks and leads to corruption.
For multinational pharma companies, the stakes are even higher as most Chinese physicians work at public hospitals and are considered government employees. That means big pharma can also run afoul of Western anti-bribery laws such as the U.S. Foreign Corrupt Practices Act (FCPA) or the U.K. Bribery Act.
In the U.S., Eli Lilly & Co., Johnson & Johnson and Pfizer Inc. have already settled FCPA allegations in emerging markets – which included China in the cases of Lilly and Pfizer – with settlements of $29.4 million, $70 million and $60 million respectively. And more settlements are likely as a slew of companies, including Merck & Co. Inc. and Bristol-Myers Squibb Co., have disclosed they are under investigation for alleged FCPA violations.
In 2010, GSK disclosed that it, too, was under FCPA investigation, saying it had received letters from the U.S. Securities and Exchange Commission and Department of Justice about activities in several unidentified countries as “part of a broader review of pharmaceutical industry practices in countries outside the USA.”
As new national leaders take the stage in China, the government appears to be tightening supervision of business activities. Recently, China’s National Development and Reform Commission (NDRC) investigated several baby formula manufacturers for price-fixing. The companies, including Abbott Laboratories Inc., Nestle SA, Mead Johnson Nutrition Co. and Danone, may face fines from NDRC. The investigations also led the companies to quickly revisit their compliance and pricing policies for China.
It remains to be seen what punishment Chinese authorities have in store for multinational pharma companies found guilty of bribery charges. The GSK case appears to be the first time the public security ministry has investigated a multinational pharma company for bribery. Bribery charges are already considered very serious for domestic companies, but without the added threat of FCPA action.