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China’s GlaxoSmithKline Crackdown

Keeping up with the GlaxoSmithKline/China story has been hard – every day or two there’s a new twist. But here’s what’s going on so far:
Four GSK executives have been arrested on charges of bribery. Hospitals, doctors, officials of all kinds – the accusations are the the GSK people jacked up prices and sales figures by greasing people everywhere they thought necessary. Report have it that travel agencies (to inflate the costs of meetings and trips as a form of payment), high-priced consultation deals, and good ol’ sexual favors were involved. In addition to the four executives who’ve been arrested, China has told GSK’s financial director for that unit that he’s not allowed to leave the country.
A mess indeed, and pretty much the last thing that GSK was in the market for, I’ll bet. I am, sadly, not amazed at the idea of large organized bribery in the Chinese market. Nor, I’m sure, are the Chinese authorities. The country has a well-publicized problem with corruption, with high-level officials regularly being removed from their positions amid accusations of all sorts of malfeasance. Even if you mark some of that up to political maneuvering and score-settling (which I’m sure are factors, too), the country’s current system of authoritarian capitalism is an invitation to such behavior on every level. Every country in the world has this sort of thing to some degree – who you know, who you’re related to, who owes you favors, who you’ve paid off – but the combination of China’s one-party system and its huge business boom of the last decades combine to make it a particular problem there.
It also combines to breed conspiracy theories. You might wonder if GSK is in trouble because their behavior was particularly noticeable or on a large scale, of if there’s some other reason that we’re not seeing. It’s impossible to say, and not very fruitful to speculate on, but it’s not a line of thought that can be dismissed easily, either. Perhaps the idea was pour encourager les autres. This article is along those lines:

A Chinese bribery investigation into British drugmaker GlaxoSmithKline (GSK.L) 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. . .
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. . .
. . .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 global managers.
Efforts made by drug firms at compliance training can even backfire, as some employees learn how to avoid detection.

That Reuters piece also mentions speculation that the Chinese government is leaning hard on drug companies for better pricing, as it faces mounting health care costs, and you can’t rule that one out, either. That’s the problem – you can’t rule much of anything out at all.

23 comments on “China’s GlaxoSmithKline Crackdown”

  1. Sam Weller says:

    “You might wonder if GSK is in trouble because their behavior was particularly noticeable or on a large scale”
    On the contrary, my guess is that GSK’s behavior was not on a large enough scale. Some high level official felt he was not being paid well enough and exposed them.

  2. Anon says:

    This also seems like a pretty good alternate explanation:
    “Pointing to China’s looming $1 trillion healthcare bill, James Zimmerman, an attorney and former chairman of the American Chamber of Commerce in China, told Reuters he believed it could be[a scheme to get drugmakers to cut prices]. “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,” Zimmerman said. “[T]he government’s legitimacy is at risk if it fails to deliver on its promise of affordable and accessible health care.”

  3. Chemjobber says:

    How do sexual favors work on that scale, anyway?

  4. Anonymous says:

    Shame on you, Derek. The bribery is from GSK. But you criticize Chinese government. You are a racist in your blood, are you?

  5. Hap says:

    Well, I don’t think GSK forced Chinese officials to take the money/sexual favors at gunpoint, no? It takes two entities to make a bribe – one to give, and one to accept.
    Also, when there is a distinct lack of transparency, and one-party rule (so that you can do business with who’s in power or not do business at all), why do you think there wouldn’t be bribery? For a US example, look at Chicago politics under Daley, or Louisiana.
    Since you can’t kick the cheaters out of your government, of course, I guess it’s easier to call the people who bring the bribery, etc., up racist and immerse your head further into your lower intestinal tract. Unfortunately, your wallet isn’t in there, so they can still get your money.

  6. Cato the Elder says:

    @4 lol. criticism does not equal racism, especially when it’s well deserved.

  7. Chrispy says:

    I’m certainly not going to give GSK a pass on this, but I do wonder how companies can be reasonably expected to operate in countries with ingrained corruption. Walmart faced the same thing in Mexico. If you need a permit, etc., and the standard way to get it is a bribe, you might find any other route to be a bit challenging.
    Even in the USA, we have essentially legalized corruption — witness all the lobbyists and PACs. When I worked for pharma, they had a PAC that the employees were all strongly encouraged to donate to. This money went straight to supporting candidates favorable to the Company. This isn’t bribery and corruption because it is legal? Seems like our system may be even more broken than China’s — we’ve institutionalized the payoffs. At least it is illegal there.

  8. Perdurabo says:

    @#4: I am a regular reader of this blog, and not once have ever detected even a hint of discrimination from the author. To simply cry “racism!” whenever somebody says something you don’t agree with is not only blatantly inaccurate and disingenuous, it also belittles those who have truly been victims of racism.

  9. MTK says:

    I read an article that basically said 3 or 4 other firms are also being investigated there.
    #1’s comment that this might be a public shakedown more than anything else is unfortunately not out of the realm of possibility.
    Just speculating here, but let’s say that there are 3 other companies besides GSK that could have been sacrificed here. And let’s say the recent research fraud fiasco at GSK China is viewed by the powers that be to be an embarrassment and an airing of dirty laundry that should not have happened. It then makes the decision of which one of the 4 companies should be humiliated and which other 3 can just up their ante to continue to play a little easier.
    Not saying this is what is happening, just saying.

  10. Pc says:

    The bribery/corruption is indeed very widespread. I have an ex-college roommate who used to work for a big pharma (starting with letter a but not Abbott). He often led a group of doctors, who are his customers in essence, to oversea trips. Let’s just say that these guys not only didn’t pay the expenses they also got various “gifts”.
    The Chinese goverment may have other intentions than just correcting the wrongs. For GSK though there’s just no excuses. You just cannot say that ’cause the local culture is like that so you have to do it that way. It’s simple as that! I certainly hope this can get as deep as possible, and get other companies (I also hope not just foreign ones) exposed as well so that maybe, just maybe even if it has very slim chance, when you look back in ten years one can say that this is a paradim shift in terms of the culture change(for the good)!
    Disclaimer, obviously I was from China.

  11. Hap says:

    The problem is that it’s tougher for outside entities to change how China does business – if the government and the people don’t want bribery to stop, then it won’t. People will see external companies’ unbribeability as an obstacle to circumvent, not as a way to emulate, and nothing will change. If the choice is between bribing to do business and not doing business, companies and people will bribe.
    If bribery is still supported by the government (or at least not suppressed), then the bribees may see getting bribes from big external businesses as a way to get money from the rich and from their national competitors. Others might support it because it means they won’t need to bribe those officials as much (because they’re getting their quotas from bigger fish). In any case, unless enough of an example is made of the bribees (after all, they work for China, and are supposed to act in its best interests, while GSK does not, and isn’t), nothing is going to change.

  12. Anonymous says:

    @4 Paid shill of the Chinese government? Or do you do it for free?

  13. Big Fish says:

    Bribery and/or sexual favors are live and well in every country and industry.
    Case in point #1 – First-hand knowledge, a certain CRO uses sexual favors to certain decision makers in certain big pharma to get drug R&D contracts.
    Case in point #2 – a service road barely used just behind our bldg has been re-paved twice: once in 2009 (during height of great recession) and once just completed a couple of weeks ago. In both cases, the road was/is in perfect condition. But they “need” to be re-surfaced anyway. Someone, please tell me there is nothing fishy going on here.

  14. Brett says:

    My guess is that the Chinese government is trying to get cost-pressure under control on drugs while also leveraging the pharma companies into a position where they might be able to take advantage of their methods and IP. They can’t get any more cost cuts out of other areas of their public health care system – bribery is already rampant in their medical system, and it and open revolts by medical staff will happen if they try to push down wages and costs on that end even further.
    RE: Chrispy #7
    The Foreign Corrupt Practices Act just blocks you from bribing foreign officials and companies to get business. You’re allowed to pay “grease payments” in order to perform the duties you were already going to do.

  15. GSK says:

    Soriot just sent out a company wide email about policy changes in Code of Conduct training. What a coincidence.

  16. Anonymous says:

    @7. Well said. I don’t see why people with legalized, systemic bribery can take the moral high ground.

  17. David L. says:

    4. Anonymous on July 18, 2013 10:16 AM writes…
    Shame on you, Derek. The bribery is from GSK. But you criticize Chinese government. You are a racist in your blood, are you?
    Why is everything racism anymore? “Racism” has become the catch-all for any disagreement…and I’m tired of it.

  18. sgcox says:

    #3: “How do sexual favors work on that scale, anyway?”
    Silvio Berlusconi ?

  19. Esteban says:

    Reminds me of a conversation I had with a colleague who regularly met with Chinese officials. Once over drinks he let it slip that when meeting with an official, it was customary to bring a gift. Flabbergasted (I was naïve then) I said “Isn’t that bribery?” To which he quoted from memory the passage in our company ethics manual forbidding such behavior.

  20. Anonymous says:

    This is not that simple. Doing business in China is tricky and risky. Google “heng li gsk” and you may understand how complicated this incident is. Every company has to make some choices when you start to do business in China.
    This is GSK’s bet and apparently not a good one. But man, how would they know beforehand?

  21. petros says:

    Now reports that UCB is being investigated

  22. Nile says:

    If it’s just one company – GSK – getting dinged for this, then all we’re seeing is a domestic rival losing their rag over getting outbid by rich foreigners with a bigger budget for bribes, and the locals have paid their regulatory officials to ‘get tough on corruption’.
    If it’s more than one company, we might be seeing a genuine anticorruption effort; this is praiseworthy and it would be nice if the home governments of the affected companies assisted this effort by cooperatiing with document-discovery and possibly with FCPA prosecutions.
    If, that is, these governments have an equivalent of the Foreign Corrupt Practices Act, or even the figleaf of an anti-corruption policy; not all do.
    Some governments will ignore their public policies on overseas corruption and do nothing, or actively obstruct investigations so as to protect the commercial interests of their generous friends in industry; and I number my own country among them.
    If the money involved in all this this was laundered through London or the Crown’s overseas dependencies, Her Majesties’ Government will stonewall all requests and award the facilitating bankers a knighthood. “Arise, Sir Greasy Fingers, Defender of the Barony of Our Ministers’ Non Executive Directorships”.
    Meanwhile, a widespread anticorruption campaign – if there is one – means that the local pharma companies will have to pay eye-watering amounts of ‘squeeze’ to stop the regulators coming in and shutting them down. Some of them will, in all probability, be guilty of the offences we hear GSK on being investigated for.
    Some of them.

  23. Dan says:

    All this is just speculation. Bloomberg has this most recent report:
    China Widens Probe of Sexual Bribes and Glaxo Execs

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