Four Drugmakers Face China Probes as Glaxo Woes Widen

Originally Appeared on Bloomberg

China is investigating at least four multinational drugmakers as it widens its probe of GlaxoSmithKline Plc (GSK), according to a lawyer in Hong Kong whose firm advises companies on cross-border anti-corruption.

The investigations point to an increased targeting of the pharmaceutical industry in corruption probes as the world’s most populous country faces rising health-care costs and seeks to lower drug prices. While the drugmakers are being examined by local regulators, the results may draw added questions from officials in Beijing and scrutiny by the U.S. government under the Foreign Corrupt Practices Act.

“We are aware of four pharmaceutical companies who are facing” investigation by local anti-corruption units, said the lawyer, Wendy Wysong, the head of anti-corruption practice in Asia-Pacific at law firm Clifford Chance. Wysong declined to identify the companies. Yesterday, Chinese officials said Glaxo used travel agencies as a conduit for bribes, that company executives received “sexual bribes,” and that other drugmakers have transferred money to the agencies.

“As to whether these companies are also involved in illegal dealings, you can go and ask them,” said Gao Feng, head of the economic crimes investigations unit at China’s Public Security Ministry. “Of course they won’t answer. But you can ask them one question: ‘Can you sleep well at night?’”

Gao didn’t identify the other companies linked financially to the travel agencies at a news conference yesterday. His comments were unusual, given that Chinese police rarely speak publicly to foreign media about ongoing investigations. The Glaxo case, Gao said, included bribes that went to “government officials, medical associations, hospitals and doctors.”

Drugmaker Target
China, the world’s fastest-growing market for medicines, has become an important target for the pharmaceutical industry as more and more best-selling therapies have gone off patent.

Glaxo’s revenue from China increased 17 percent last year to 759 million pounds ($1.1 billion), while product sales for London-based AstraZeneca rose 20 percent in China to $1.5 billion. Pfizer Inc. and Merck & Co., the two biggest U.S. drugmakers, together employ about 14,000 people in China. AstraZeneca, Pfizer and Merck haven’t been identified by China as targets of their probe.

Glaxo said in an e-mailed statement it is “deeply concerned and disappointed” and will stop using agencies identified in the probe. The drugmaker is reviewing all third-party agency relationships and will cooperate with Chinese authorities, according to the statement.

U.S. Act
The U.S. Foreign Corrupt Practices Act bars corporate employees or their agents from paying bribes to government officials to obtain or retain business or to secure an improper advantage. Glaxo is among several drugmakers that have already been contacted by U.S. authorities in an ongoing industrywide probe into possible violations of the act. That Glaxo probe, begun in 2010, covers practices in countries that include China, according to the company’s 2012 annual report.

AstraZeneca, in its 2012 annual report, also said it is investigating indications of inappropriate conduct in countries that include China. The company said it received inquiries from U.S. authorities related to “among other things, sales practices, internal controls, certain distributors and interactions with health-care providers and other government officials in several countries.”

“This is an ongoing matter and AstraZeneca is co-operating with the inquiries,” Esra Erkal-Paler, a spokeswoman for London-based AstraZeneca said in an e-mail, referring to the U.S. inquiry. “We have no update to provide at this time.”

China President
In China, President Xi Jinping has vowed to combat official corruption since becoming head of the Communist Party in November. At the same time the country has been moving aggressively to get drugmakers to lower prices as it prepares to widen health coverage, with the top economic planning agency probing the costs and prices of 60 drugmakers including Glaxo, Merck, Novartis AG and Baxter International Inc.

Foreign drugmakers in regular contact with Chinese officials overseeing the health system are an obvious target for anti-corruption probes, said Willy Wo-Lap Lam, an adjunct professor at the Chinese University of Hong Kong who studies the politics of that country.

“The medical system is a disaster zone when it comes to high-level corruption,” Lam said in a telephone interview. “Since they instituted the anti-corruption campaign, areas of abuse within the medical system could be targets.”

Regulatory Agencies
In China, every province and city have local agencies that regulate commercial activity. These units, formally known as the Administration for Industry and Commerce, or AIC, hold broad powers to investigate possible malfeasance, seize evidence and impose financial penalties without a warrant, according to a note from consulting firm Control Risks. They also have the authority to order the disgorgement of profits earned through unfair commercial practices.

In some cases, if a company operates in more than one community, a probe can begin in one jurisdiction and spread to others, with the different AIC branches exchanging information, said Wysong, who wasn’t commenting specifically on Glaxo.

Finding by these local agencies could trigger further scrutiny under the U.S. foreign practices act, said Sam Williamson, a partner who specializes in anti-corruption law at the Shanghai offices of Kirkland & Ellis LLP.
The settlement of AIC corruption charges “could have significant implications back in the U.S.,” said Williamson, a former U.S. prosecutor. The Justice Department is “familiar with the AICs and often ask companies questions about this -- for example what AIC investigations a company has had and how did they play out.”

‘Most Shocked’
China may also take its cues from the U.S. At yesterday’s press conference, the Chinese investigator Gao mentioned Glaxo’s 2011 agreement to pay $3 billion to settle U.S. claims the company marketed drugs for unapproved uses and other matters.

“We were most shocked” by the settlement, Gao said. “At the time, we were very puzzled as to what actually happened at the company and, through our investigations, we have found the answer.”
Whistle-blowers can also drive investigations by anti-corruption agencies, said Kelly Austin, partner-in-charge of the Hong Kong offices of law firm Gibson, Dunn & Crutcher.

“Sometimes they’re started by a whistle-blower, sometimes by a disgruntled competitor, and sometimes it can be a result of their own enforcement action,” Austin said in an interview.

Police Investigation
The Glaxo probe is a result of police investigations, not a whistle-blower’s complaint, Gao said at the press conference.

Half of all the overseas bribery cases settled last year involved activity conducted in Asia Pacific, according to the U.S. Securities and Exchange Commission’s website.

Glaxo’s troubles in China began surfacing last month. The company spent four months investigating a whistleblower’s claims of corruption and bribery at its China business. Glaxo said that it found no evidence of wrongdoing. That same week, Glaxo fired its head of Chinese research and development after finding that a paper he helped write for a medical journal contained data that had been misrepresented, according to the company.

A police investigation followed. China detained four senior Glaxo executives on suspicion of economic crimes involving 3 billion yuan ($489 million) of spurious travel and meeting expenses, and receiving sexual favors.

The alleged offenses date to 2007 and involved 700 travel agencies, Gao said at yesterday’s briefing. The ministry has been handling the Glaxo case for more than half a year following police investigations, Gao said.
China’s probe of drugmakers will probably continue to expand, said Lam of the Chinese University of Hong Kong.


“We are only at the beginning of an anti-corruption campaign which will last for at least one year,” Lam said.