15 Jul (REUTERS – BEIJING) – British drugmaker GlaxoSmithKline Plc (LSE:GSK.L – News) channelled bribes to Chinese officials and doctors through travel agencies for six years to illegally boost sales and to raise the price of its medicines in China, police said on Monday. Four senior Chinese executives from GlaxoSmithKline (GSK) had been detained, said Gao Feng, head of the economic crimes investigation unit at the Ministry of Public Security.
Since 2007 the company had transferred as much as 3 billion yuan to more than 700 travel agencies and consultancies, Gao told a news conference. He did not make clear how much of this money was spent bribing officials and doctors.
Last week the Ministry of Public Security said GSK executives in China had confessed to bribery and tax violations.
Until Monday, Chinese authorities had released few details on the probe into Britain’s biggest drugmaker, one of a string of investigations into foreign firms and their pricing practices in the world’s second-biggest economy.
“We have sufficient reason to suspect that these transfers were conducted illegally,” Gao said.
“You could say the travel agencies and GSK were criminal partners. Among the partners, GSK was mainly responsible. In a criminal organisation there is always a leader.”
GSK officials were not immediately available for comment on Monday. The company has previously said it had found no evidence of bribery or corruption in China, but added it would cooperate with the authorities. It has said it was only told about the investigation in early July.
The detained executives include Liang Hong, vice president and operations manager of GSK (China) Investment Co Ltd and Zhang Guowei, the company’s vice president and human resources director, the official Xinhua news agency reported.
It was unclear if any of the executives had legal representation.
KEY MARKET FOR DRUGMAKERS
China is an increasingly important country for international drugmakers, which are relying on growth in emerging markets to offset slower sales in Western markets where many former top-selling medicines have lost patent protection.
IMS Health, which tracks pharmaceutical industry trends, expects China to overtake Japan as the world’s second biggest drugs market behind the United States by 2016.
The charges of bribery make the GSK case the highest profile corporate investigation in China since four executives from mining giant Rio Tinto Plc (LSE:RIO.L – News) (ASX:RIO.AX – News) were jailed in March 2010 for taking bribes and stealing commercial secrets.
Gao gave no specific examples of how the bribery involving the GSK executives worked in practice. He said there were also instances of “sexual bribery”, although he did not elaborate.
The official People’s Daily newspaper said GSK collaborated with travel agencies to funnel bribes to doctors and officials by creating fake “conference services” as expenditure for GSK in order to misappropriate funds, some of which would then be spent on bribes.
GSK supplies key products such as vaccines in China, as well as drugs for lung disease and cancer.
Xinhua, given access to Liang by the authorities, quoted the detained executive as saying medicine which cost 30 yuan to make could end up being sold to patients for 300 yuan. It did not specifically say Liang was referring to GSK drugs.
The police last Thursday said the case against GSK involved a large number of staff, with bribes offered to Chinese government officials, medical associations, hospitals and doctors.
UNUSUAL FOR POLICE TO GIVE SUCH DETAIL
Legal experts said the fact the police had disclosed so much information during its investigation suggested the executives would be charged and found guilty.
Under China’s legal system, formal charges would only be announced after preliminary investigations are completed.
“The police would not usually reveal the details of cases they are handling … they usually wouldn’t reveal so much information before a final judgment is handed down,” said Yang Zhaodong, partner at Chinese law firm King & Capital, while declining to comment specifically on the GSK case.
“If they are already revealing such information, it means that they feel they have a fairly complete set of evidence.”
In the Rio Tinto case, the four executives – one a China-born Australian citizen and three Chinese nationals – received jail terms of between seven and 14 years after being found guilty of getting information from confidential strategy meetings of the body representing China’s steel industry in negotiations with iron ore suppliers.
Police said they had taken no action against any British nationals in the GSK case. No information had been received from GSK’s UK headquarters, they added.
China has targeted foreign firms on multiple fronts in recent months, including alleged price-fixing, quality controls and consumer rights, forcing companies to defend their reputations in a country where international brands often have a valuable edge over local competitors in terms of public trust.
European food groups Nestle (NESN.VX) and Danone (DANO.PA) recently said they would cut the price of infant milk formula in China after Beijing launched an investigation into the industry.
Units of GSK, Merck & Co Inc (MRK.N), Astellas Pharma Inc <4503.T> and other foreign and domestic drugmakers are also being investigated by China’s top economic planning agency on cost and pricing issues.
Gao said police had uncovered information during their investigation which pointed to similar money transfers made by other multinational pharmaceutical companies.
“Whether they (other companies) were engaged in illegal behaviour, you can go interview them. But they will not respond to you,” said Gao.
“You just need to ask them one question: Are you sleeping well at night?”
(Writing by Kazunori Takada and Paul Carsten. Editing by Dean Yates)