GlaxoSmithKline Admits Bribery!

GlaxoSmithKline has announced today that there appears to have been various executives that have indeed broken the law in China and that comes just two days before releasing interim results on GSK on Wednesday July 24th. It has emerged that on Sunday July 21st, GlaxoSmithKline made contact with the British Fraud Office in order to discuss its fraudulent activities in China.

GSK: Andrew Witty

GSK: Andrew Witty

Sir Andrew Witty, Chief Executive Officer of GlaxoSmithKline will come in for a severe roasting and have a few questions to answer on Wednesday as results are published for the British pharmaceutical company.

The reason why GSK has contacted the British Fraud Office is that under British law (2010 Bribery Act) the Serious Fraud Office has the right to investigate both in the UK and overseas. But, more importantly, if the company that is accused of fraud alerts the SFO and takes an active role in demonstrating that they are doing everything to rectify the situation, then they may gain immunity from prosecution. It remains to be seen whether that will be upheld in China.

But, this is not the first incidence of bribery that has taken place concerning GSK. In 2012, GSK reached a deal valued at $3 billion in the USA when it was discovered that the company had been peddling their drugs in the US by providing doctors there with lavish holidays. At the time Andrew Witty stated “In recent years, we have fundamentally changed our procedures for compliance, marketing and selling in the US to ensure that we operate with high standards of integrity and that we conduct our business openly and transparently”. The question is now being raised as to whether the procedures were fundamentally changed everywhere, or not.

According to a statement issued by GSK bribery has taken place and four executives working for the company have been detained by police and are in custody at the present time. GSK’s international president for emerging markets, Abbas Hussain said “Certain senior executives of GSK China who know our systems well, appear to have acted outside of our processes and controls which breaches Chinese law”. In addition, Steve Nechelput, the Finance Officer has been detained also and is not allowed to leave the country while investigations are being carried out.

In a vast price-fixing and bribery scandal it has been revealed that 700 travel agencies had $489 million (3 billion Yuan) transferred to them in order to carry out the bribing of doctors and hospital officials in a bid for those doctors to prescribe GSK drugs above all others.  GSK has qualified the bribery as “shameful”. Sales increased in China for GSK by 20% in 2012, meaning a total value of $1 billion.

GSK has stated that it will cooperate fully with the Ministry of Public Security in China and that there will be changes made to policies that are implemented by the company so that the price of drugs is brought down to an affordable level for Chinese people.

Most people are saying in China that the hospital employees and doctors are nothing more than corrupt officials that are out to get everything they can in a bid to improve their wealth and benefit from a system in which the drug companies operating on Chinese territory need to make massive gains to compensate for falls in sales in the western world. Due to the fact that hospitals are badly funded in China, doctors over-prescribe drugs and prescribe unnecessary drugs. It’s the highest bidder with regards to the pharmaceutical companies as to which drug gets prescribed right now.

However, there are also reports of the fact that GSK and other drug manufacturers seem to pale into insignificance in comparison with what local manufacturers are actually doing. At least, companies like GSK seem to be abiding by stringent manufacturer regulations that have been established in the west for years. Granted, the fraud and the bribery is an ethical question that needs to be addressed, but the issue of the manufacturing process and regulation of the producing of drugs and medication also needs to be dealt with by the Chinese administration.

GSK: Bribery

GSK: Bribery

There are rumors that in actual fact the Chinese government has no intention of bringing its medical house into order by prosecuting GSK. Perhaps the only reason that the state has taken action is simply because they wish to reduce the inflated cost of drugs that are being put on the market. The health industry in China is currently worth about $350 billion and there have been improvements in leaps and bounds concerning the health of Chinese people. 95% of Chinese people receive health insurance coverage (although there is a ceiling, beyond which the patient must pay for themselves). In 2003 that health-insurance coverage stood at just 30% of the population.

Some are suggesting that the Chinese state has been somewhat forced to listen to disgruntled Chinese people. Although, honestly, that would seem rather debatable. Listening to the people is hardly the strong point of the Chinese-administrative policy, is it? A new leaf? There are nearly 20, 000 attacks every year on hospital employees in China today and in 2006 there was a riot involving 2, 000 people that took place at a Sichuan-Province Hospital when a young child aged three died from pesticide poisoning. Doctors had refused to provide any form of treatment until the parents paid in cash to do so. They were unable to raise the cash and the child died.

We will also probably remember the execution in 2007 of the Chinese drug regulator Zheng Xiaoyu who accepted bribes and approved the launching on the market of sub-standard drugs. He lined his pockets with $850, 000. He was sentenced to death and despite an appeal was executed.

In 2005, baby milk caused the death of thirteen babies after it was discovered that the milk had no value in terms of nutrition whatsoever. Despite the clampdown in 2007 and the execution meaning that China was trying to send a message of zero tolerance in terms of food and safety issues in the country, there was another infant-formula scandal that broke in 2008. There were some 300, 000 victims, and 54, 000 babies hospitalized due to the milk being contaminated with melamine.

The Shanghai offices of AstraZeneca also had a visit from the police on Friday July 19th and one employee was taken away and will be retained for questioning. However, a spokesperson for the British drug manufacturer stated that AstraZeneca “is committed to acting with integrity at all times and in all of our operations and interactions around the world. AstraZeneca adheres to high ethical standards in the pharmaceutical industry, and does not tolerate any illegal or unethical conduct in our business activities”.

GlaxoSmithKline is down today at 10:24 ET by 1.14% (-$19.5 to $1, 695.5).

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