[Ip-health] Bloomberg News - Police Say Sexual Favors Spur $1.5 Billion Glaxo China Sales

Riaz K Tayob riaz.tayob at gmail.com
Wed Jul 17 04:55:52 PDT 2013

[With this kind of behaviour one would expect WHO to treat BigPharma 
differently... seems unlike Chan's claims, they do behave very much like 
Tobacco companies (who incidently are engaged in controversial 
issues/practices in UK and Europe around plain packaging)... of course 
if BigPharma knows your perversion, then enough said, or is this too 

  Police Say Sexual Favors Spur $1.5 Billion Glaxo China Sales

By Bloomberg News - Jul 16, 2013 12:57 PM GMT+0200

China Widens Probe of Sexual Bribes and Glaxo Execs

GlaxoSmithKline Plc (GSK) <http://www.bloomberg.com/quote/GSK:LN>'s 
(GSK) sales in China jumped 20 percent to about 1 billion pounds ($1.5 
billion) last year, almost quadruple the pace of growth across its 
emerging markets. Police say bribes and sexual favors spurred the gain.

An employee of GlaxoSmithKline Plc (GSK) enters the company's 
headquarters in Shanghai. Photographer: Peter Parks/AFP/Getty Images

The drugmaker now faces allegations of economic crimes involving 3 
billion yuan <http://topics.bloomberg.com/yuan/> ($489 million) of 
spurious travel and meeting expenses, and trade in sexual favors, the 
Public Security Ministry said yesterday. The allegations are "shameful" 
and would be a breach of the company's systems and values, Glaxo said in 
a statement 

Prior to a police probe that began last month, Glaxo embarked on a 
strategy that tripled its Chinese sales force to more than 4,000 people 
in three years as the U.K.'s largest drugmaker sought a bigger share of 
the market. As that expansion was ramping up, Chief Executive Officer 
Andrew Witty told analysts on a February 2010 conference call that 
controlling Glaxo's operations in China 
<http://topics.bloomberg.com/china/> was "not a trivial proposition."

Bribes paid to hospitals, doctors and health officials contributed to 
the resulting gains in revenue, according to the ministry, which 
controls China's police. If found guilty, Glaxo could be ordered to pay 
a penalty of $5 million to $10 million, according to estimates by Kepler 
Capital Markets based on fines paid in China for similar violations.

That'd be a fraction of its sales in China, the world's fastest-growing 
major pharmaceutical market, said Fabian Wenner, a Kepler Capital 
health-care analyst in Zurich.

    Reputation Damage

"While being involved in criminal offenses and associated with illegal 
actions is clearly damaging for GSK's reputation, I doubt that this will 
be of material impact for the company," Wenner said in an interview 
yesterday. "I haven't spoken to any investor who is concerned about this 

Glaxo fell 0.9 percent <http://www.bloomberg.com/quote/GSK:LN> to 
1,728.50 pence as of 11:50 a.m. in London trading. The stock has risen 
29 percent this year, compared with a 17 percent gain in the Bloomberg 
Europe Pharmaceutical Index.

In a December 2009 business strategy briefing, Mark Reilly, head of 
Glaxo's China pharmaceuticals business since 2009, described a vision to 
"deliver growth consistently above the market growth rate" in the country.

Glaxo would expand into hospitals in smaller Chinese cities and rural 
areas, build on its lead in respiratory drugs and vaccines, and 
"aggressively grow" its diabetes franchise, according to slides of 
Reilly's presentation 

Julian Heslop, who retired as Glaxo's chief financial officer in 2011, 
explained on a March 2010 conference call that the company had realized 
it needed more salesmen after examining the operations of other drugmakers.

    Market Share

"I looked at China and I looked at the competitors and I plotted sales 
force size with market share and there's an amazing correlation," Heslop 
told analysts during the call. "The more salesmen, the more penetration 
of the country, the bigger the market share."

Heslop said the analysis led Glaxo to realize it had made a "mistake" 
when it focused more on increasing profits in China than on increasing 

China's accusations against Glaxo come a year after the company agreed 
to plead guilty and pay $3 billion to resolve U.S. criminal and civil 
allegation that it illegally promoted prescription drugs and failed to 
report safety data.

    Pfizer, Lilly

Eli Lilly & Co. (LLY) <http://www.bloomberg.com/quote/LLY:US> in 
December agreed to pay $29.4 million to settle U.S. Securities and 
Exchange Commission allegations that employees gave cash and gifts to 
officials in China, Brazil <http://topics.bloomberg.com/brazil/>, Russia 
<http://topics.bloomberg.com/russia/> and Poland 
<http://topics.bloomberg.com/poland/> to win millions of dollars in 
business. Pfizer Inc. (PFE) <http://www.bloomberg.com/quote/PFE:US>, the 
world's biggest drugmaker, agreed last August to pay $60.2 million to 
settle foreign bribery cases it disclosed to U.S. authorities involving 
alleged payments paid by employees and agents of subsidiaries, including 
in China.

"As GSK supplies a range of important drugs for public health, we doubt 
that there will be an enduring impact on its business in China," wrote 
Deutsche Bank AG's London-based analyst Mark Clark in a June 12 note to 

Glaxo and rivals face a potentially greater threat in China from a 
pricing investigation announced this month by China's National 
Development and Reform Commission, the top economic planning agency, 
Clark said.

    Price Cuts

"There have been suggestions that this could result in large price cuts 
for those products that are available more cheaply in reference 
countries abroad," Clark said.

Glaxo's revenue in China last year equate to about 3.8 percent of the 
company's total, Chief Financial Officer Simon Dingemans said in an 
interview in May. The company's emerging markets 
<http://topics.bloomberg.com/emerging-markets/> sales grew 5.6 percent 
in the period to 1.56 billion pounds, according to data compiled by 

Pharmaceuticals sales in China are projected to expand 15-to-18 percent 
annually through 2016, IMS Institute for Healthcare Informatics said in 
July last year.

The heritage of GlaxoSmithKline in China dates from 1908, the company 
said in a 2007 press release 
It was one of the first foreign pharmaceutical companies to establish a 
joint venture in China, with six manufacturing sites there and 
investment of more than $500 million, according to its website.

"To boost the prices and sales volume of their drugs, the company has 
taken some illegal actions," Gao Feng, head of the economic crimes 
investigations unit at the Public Security Ministry, told reporters in 
Beijing yesterday. "GSK's marketing strategy includes many things that 
allow and even encourage bribery activities."

The use of kickbacks is a key reason why drug prices are higher in China 
than they ought to be, Gao said.

    Bribing Costs

"GSK takes a large portion of the profits from its drug sales in China 
to bribe government officials, medical associations, hospitals and 
doctors," he said. "Expenses for bribery are ultimately being covered by 
the public."

Glaxo will cooperate fully with the Chinese authorities in their 
investigation and take all necessary action required, the drugmaker said 
in yesterday's statement 

"GSK shares the desire of the Chinese authorities to root out 
corruption," the company said. "These allegations are shameful and we 
regret this has occurred."

    Executives Detained

Four senior Glaxo executives -- all Chinese nationals -- have been 
detained as part of the investigation, Gao said. Enforcement measures 
haven't extended to expatriate staff, though "we can't promise 
anything," he said, adding that Reilly left the country on June 27 after 
his colleagues were detained.

Reilly returned to the U.K. on a routine, planned business trip and has 
been working from company headquarters on the response to the 
investigation, according to a person with knowledge of the matter who 
asked not to be identified because he wasn't authorized to speak on the 
subject. The person declined to say when or if Reilly will return to China.

The drugmaker has been boosting its research and development presence in 
China. For example, it opened an innovation center to develop consumer 
drugs, and set up a unit testing botanicals, compounds extracted from 
herbs used in traditional Chinese medicine, to treat immune disorders.

Those efforts hit a snag last month, when the company announced that it 
its head of Chinese research and development. It was discovered that a 
paper the scientist helped write for the journal Nature Medicine 
contained data that had been misrepresented. A second individual 
resigned and three others were placed on administrative leave pending a 
final review, and the company requested the paper be retracted.

"If something like the scientific retraction had occurred in the U.S. or 
Europe, the company involved would just have said that a researcher made 
an error," said Greg Scott, founder of Shanghai-based life sciences 
consultancy ChinaBio LLC, in an e-mail. "But it happened in China, so it 
affects the perception of the whole country."

To contact Bloomberg News staff for this story: Daryl Loo in Beijing at 
dloo7 at bloomberg.net <mailto:dloo7 at bloomberg.net>

To contact the editor responsible for this story: Jason Gale at 
j.gale at bloomberg.net <mailto:j.gale at bloomberg.net>

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