GSK case sounds alarm for foreign firms

Local shoppers get different treatment

The bribery investigation of GlaxoSmithKline (GSK) China has been completed and the case handed over to prosecutors, Changsha police said on Wednesday.

Prosecutors have started their examination of the case that involves a total of 46 suspects, with Mark Reilly, a British national and manager of GSK China, among them. After ten months of investigation, police found that Reilly had ordered his subordinates to offer bribes.

Reilly allegedly pressed his sales teams to bribe hospitals, doctors, other medical institutions and organizations through various means and gained illegal revenue of billions.

Reilly was promoted to general manager of GSK China in November 2012. Two other executives, Zhang Guowei and Zhao Hongyan, are also suspected of bribing officials in Beijing and Shanghai to escape investigation.

BIGGER BRIBES BRING BETTER SALES

To boost sales and squeeze out rival companies, GSK China allegedly bribed doctors to prescribe their drugs. Li, one of the suspects and a doctor at a Hunan hospital, told Xinhua that in March 2012, a GSK sales representative offered him 20 yuan (3 US dollars) for every box of Heptodin he prescribed and 100 yuan for every new patient who started using the drug. Heptodin is used to treat Hepatitis B.

Li normally prescribed 150 to 200 boxes of Heptodin and recruited five to eight new patients each month, which brought him about 4,800 yuan of extra income. GSK China's sales rep Tan would register the expense as payment for Li lecturing in the company's training programs.

"I paid him every month but in fact he just gave lectures once or twice," said Tan.

Another way to bribe doctors is to cover the expenses of attending "medical seminars".

Zhang Guowei, a key suspect who was vice president and human resources director of GSK China, told Xinhua that the focus on sales growth led directly to the bribery.

"Global headquarters imposed high sales growth targets. When Reilly took over the post, the company's strategy shifted from profit-oriented to sales-oriented. The sales target in China was raised every year to compensate the reduction in U.S. and European markets," Zhang said.

According to Guo Jianhua, a human resources manager also involved in the case, the company's sales force increased from about 1,000 in 2008 to 5,500 today.

Police found that company policy obliged the sales team to bribe doctors to meet their soaring targets. Liang Hong, who was the company's vice president and operations manager, confirmed that those who met targets received big bonuses, promotions and overseas vacations while those who failed were demoted or fired.

In a statement to police, Liang said every representative was allowed to spend 3,000 to 5,000 yuan on kickbacks to doctors every month. "If this was not enough, they could apply for more. For hepatitis medicines, the kickback can account for five to eight percent of the drug's price," he said.

He estimated that money used for bribery accounted for 30 percent of the value of medicine, totalling hundreds of millions yuan each year.

GSK China's revenue in China increased from about 3.9 billion yuan in 2009 to 6.98 billion yuan in 2012.

According to police, Reilly and his colleagues disguised illegal revenue in the Chinese market by forging transactions between GSK China and several foreign arms of GSK, making the revenue look like funds used to purchase raw materials in China. They made every effort to cover up the illegal practice during regular checks by regulatory authorities. In terms of sales of prescription drugs and vaccines, police found that all pharmaceutical factories and departments of GSK China nationwide had been involved in commercial bribery.

Last July, police detained four senior executives of GSK China on suspicion of commercial bribery. Reilly was not among them.

DRUG PRICE INFLATION

The investigation exposed how GSK inflated drug prices to accommodate bribery expenses and high profits. According to the police, in the most extreme case, the price on the Chinese market was seven times that in other countries.

A company document obtained by Xinhua showed that a box of Heptodin is priced 142 yuan by GSK China but only 18 yuan in South Korea, about 26 yuan in Canada and 30 yuan in the United Kingdom.

Police statement said GSK China intentionally inflated prices on the Chinese market by making false declarations to Chinese customs. Chen Hongbo, former vice president of GSK China, told the police that the price was further inflated when drugs were imported into China and packed in GSK's factories here. When a drug was sold to China, the factory price has already included profits and commissions. To avoid paying taxes in China, the company would divide production among GSK branches in different countries and pack them in China as the last step, according to Chen.

The actual cost of a box of Heptodin is 15.7 yuan. It is declared as 73 yuan at customs and priced at 142 yuan as factory price. The highest retail price is 207 yuan in China.

Through such practices, the company disguised profits as costs. Although revenue soared from 2009 to 2012, booked profits remained small. In 2012, it recorded a loss of 188 million yuan on a main business revenue of 6.98 billion yuan.

To sell such expensive drugs, high kickbacks to hospitals and doctors became a necessity.

46 suspects allegedly bribed doctors, government officials

A total of 46 suspects are involved in the case. Two executives, Zhang Guowei and Zhao Hongyan, are also suspected of bribing Beijing and Shanghai government officials to escape the probe.

The cost for bribery and sales team expansion was transferred to Chinese customers, as some GSK products are seven times more expensive than the same products sold in other countries. All the related transactions were settled through their overseas bank accounts, investigators said.

A GSK China spokesperson said Wednesday that the firm has met with the Ministry of Public Security to discuss the case. They pledged to cooperate fully with authorities and prosecutors are now reviewing the case.>>>More

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The bribery investigation of GlaxoSmithKline (GSK) China is complete and the case has been handed over to prosecutors, Changsha police said on Wednesday.

According to police, Reilly and his colleagues disguised illegal revenue in the Chinese market by forging transactions between GSK China and several foreign arms of GSK, making the revenue look like funds used to purchase raw materials in China. They made every effort to cover up the illegal practice during regular checks by regulatory authorities. In terms of sales of prescription drugs and vaccines, police found that all pharmaceutical factories and departments of GSK China nationwide had been involved in commercial bribery.>>>More