GSK Under Fire Again For Alleged Corruption in China

 The risks for businesses from outside of China from operating in China have been well-illustrated by the problems now faced by pharmaceutical giant GlaxoSmithKline plc ("GSK”).

 GSK is facing claims that it made corrupt payments of around £323m to Chinese doctors in order to win market share. GSK is cooperating with the Chinese government in an investigation which might result in a substantial fine or other punishments for the company.

A Big Name in Big Pharma

GSK is a British multinational pharmaceutical, biologics, vaccines and consumer healthcare company. It is the world's fourth-largest pharmaceutical company measured by sales (after Pfizer, Novartis, and Sanofi) and was established in 2000 by the merger of Glaxo Wellcome plc (formed from the acquisition of Wellcome plc by Glaxo plc) and SmithKline Beecham plc.

GSK has an enormous product portfolio covering just about every disease area major disease area including asthma, cancer, virus control, infections, mental health, diabetes and digestive conditions. It also has a large consumer healthcare division that produces and markets oral healthcare and nutritional products, drinks and over-the-counter medicines.

Whilst sales from China are relatively low compared with GSK’s other global operations and markets GSK has invested heavily into China. It has spent over £320m on a research and development base in Shanghai and has six manufacturing plants in the country employing over 8,000 people. In 2012 GSK's revenues were £750m, but they have been growing fast.

With China's healthcare spending forecast to nearly triple to $1 trillion by 2020 from $357 billion in 2011 (according to consulting firm McKinsey) China is clearly a hugely attractive market for the big pharmaceutical multinationals like GSK, Pfizer, Novartis and Sanofi.

The Economist Intelligence Unit estimates that drug sales could total US$166 billion in China by 2017, China has, therefore become an increasingly important market for international pharmaceutical companies which have come to rely on it, and other emerging markets, to offset declining sales in developed economies, where many of their high-profit drugs have lost patent protection.

Caught Out?

In July 2013, GSK confirmed that some of its senior Chinese executives appeared to have broken the law after police accused it of funnelling up to 3 billion yuan (approx. £323 million) to travel agencies to facilitate bribes to doctors to boost the sale of its medicines.

"GSK shares the desire of the Chinese authorities to root out corruption" said the official statement from GSK in the wake of yet another scandal to hit the multinational.

The statement went on:

"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. We have zero tolerance for any behaviour of this nature."

China's official news agency Xinhua quoted Huang Hong, general manager for GSK's in China and one of the detained executives, as saying that GSK had set goals for annual sales growth as high as 25 per cent. That rate was 7 to 8 percentage points above the average growth rate for the industry.

Huang Hong went on to blame GSK's corporate culture in China for the activities currently being investigated. She suggested former GSK China chief, Mark Reilly, had "fostered an aggressive sales culture that indirectly encouraged widespread bribery on the mainland". "With such unreasonable targets, if we do not resort to illegal measures, it's very difficult to achieve such high sales growth. Mark Reilly changed the company's objective to sales being king." GSK dispute such allegations.

Regular readers of the tutor2u Business and Economics Blogs will know that this is not the first time that GSK has been investigated for corruption. In 2012, GSK was fined £1.9bn in the US (the largest ever such fine) after being found guilty of off-label marketing - an illegal strategy. GSK had targeted the antidepressant Paxil at patients under age 18 when it was approved only for adults, and promoted the drug Wellbutrin for uses it was not approved for, including weight loss and treatment of sexual dysfunction.

Corruption in China's healthcare industry is fuelled in part by low base salaries for doctors at the country's 13,500 public hospitals, the main buyers of drugs. As a result, attempts to reduce or eliminate corruption may prove tough because bribes are viewed as top-up pay by many doctors.

China is in the midst of a once-in-a-generation expansion of its healthcare system. It is making a massive investment in healthcare infrastructure and implementing a national insurance plan that provides extensive healthcare support for China’s population. However, it is widely thought that the foundations for healthcare in China are weak, not the least the doctors who are described as being “chronically over-worked and under-paid”. In a medical system mostly controlled by the Chinese government, doctors are considered civil servants and are paid as such, with a monthly salary ranging from $470-1,250 per month.

This is the environment in which GSK and other multinational pharmaceuticals have attempted to compete. Might it be that the crackdown on corruption by Chinese officials is making China a significantly less attractive place for multinationals to operate in? Are only foreign firms being targeted leaving domestic Chinese competitors untouched and with a clear advantage?

The potential scale of the penalties that might be applied to GSK if the allegations are proved may even see GSK exit China.

Corruption as a Key Risk of Doing Business in China?

Corruption is widespread in many areas of business life in China. Transparency International (TI), an organisation that tracks corruption trends around the world, ranks China 80th out of 176 countries in its latest corruptions-perceptions index.

China's leadership have vowed to attack corruption in both political and business areas:

General-Secretary, Xi Jinping recently declared:

"We must have the resolution to fight every corrupt phenomenon, punish every corrupt official and constantly eradicate the soil which breeds corruption, so as to earn people's trust with actual results."

This impressive timeline from the South China Morning Post provides a comprehensive listing of recent arrests and charges laid against officials in China accused of bribery and other corruption.