At first it was just GlaxoSmithKline, the multinational mega drugmaker headquartered in the UK, that has been on the hot seat in China for a month. Four of its Chinese executives were arrested: China VP and operations manager Liang Hong, human resources director Zhang Guowei, legal affairs director Zhao Hongyan, and business development manager Huang Hong. GSK’s general manager in China, a Brit named Mark Reilly, absconded to London in June.
The company allegedly paid bribes, including “sexual bribes,” to “government officials, medical associations, hospitals and doctors,” by using travel agencies as conduit, explained Gao Feng, head of the economic crimes investigations unit at China’s Public Security Ministry. Apparently, these ingenious travel agencies invented conferences that never took place, but on paper required staff attendance. The resulting fake travel and meeting expenses – in total 3 billion yuan ($489 million) – were then rechanneled to bribe doctors into prescribing certain drugs. But the “sexual bribes” were not quantified in monetary units.
“We have sufficient reason to suspect that these transfers were conducted illegally,” said Gao Feng. “You could say the travel agencies and GSK were criminal partners.”
Now it turns out that GSK wasn’t the only one. In a sign of hyper-imaginative thinking, other drugmakers also used travel agencies as conduit. And once the investigation of GSK started, it also infected them. “As to whether these companies are also involved in illegal dealings, you can go and ask them,” Gao Feng added cryptically, without naming names or specifying how many firms were involved. “Of course they won’t answer. But you can ask them one question: ‘Can you sleep well at night?’”
They probably can’t. Because this might get expensive. Word is that four more multinational drugmakers are on the hot seat along with GSK.
With consequences in the US – where these acts would run afoul of the Foreign Corrupt Practices Act. GSK already conceded in its 2012 Annual Report that the SEC and the Department of Justice have been investigating its activities in a long list of countries, including China, since 2010!
This “industry-wide enquiry,” as the annual report called it, was trying to determine if drugmakers “may have engaged in violations of the Foreign Corrupt Practices Act relating to the sale of pharmaceuticals.”
And it wasn’t just the US Foreign Corrupt Practices Act, but also “the UK Bribery Act, or similar legislation in other countries,” the annual report pointed out. It “could expose the Group and senior officers to civil and criminal sanction” and could entail “fines, prosecution, debarment from public procurement and reputational damage, all of which could materially and adversely affect the Group’s financial results.” Ominously, it added, “No provision has been made for this matter.”
Ominously, because in 2012, GSK paid $3 billion in the US to settle a variety of charges, including that it promoted drugs for unapproved uses – a fact that Gao Feng specifically pointed out: “We were most shocked,” he said. “At the time, we were very puzzled as to what actually happened at the company and, through our investigations, we have found the answer.”
Yup, the lurid business of pushing drugs.
GSK tried to defend itself, with a statement, claiming that it suddenly “shares the desire of the Chinese authorities to root out corruption” and emphasized that “GSK has zero tolerance for any behaviour of this nature.”
The SEC and the Department of Justice are also probing other drugmakers, including AstraZeneca, as it admitted in its 2012 Annual Report, for “among other things, sales practices, internal controls, certain distributors and interactions with health-care providers and other government officials in several countries,” including China. And it too could “involve the payment of fines and/or other remedies.”
Then on Tuesday, Liang Hong, one of the four Chinese executives arrested over the allegations, was dragged on state-owned TV during the evening – looking “disheveled,” the BBC reported – and confessed that he’d paid bribes and that these bribes had served their purpose, namely selling drugs and pushing up prices. Unwittingly, he’d put his finger on the root cause of the worldwide morass which Big Pharma has been wallowing in with such consistency over so many years. At the expense of everyone else.
The China effect has been fearsome, destroying jobs and shuttering factories around the world. But in China, subsidies have created enormous overcapacity, inefficiencies, a wall of debt, and other challenges. Here are three eye-opening articles: Innovation Hurdle, China’s Ambitions in Excess, and Steelmakers Struggle to Shut Down Capacity. Plus John Mauldin’s excellent introduction. Read.... Outside the Box: Whither China?