GSK bribery case rings a warning bell for foreign firms in China

The GlaxoSmithKline (GSK) bribery saga has once again put business ethics at the centre of debate on how to do business in China

Global pharmaceutical firms are having to defend their reputation after police in China charged GSK's former China boss, Mark Reilly, and two other colleagues with corruption last week (14 May). This comes after a 10-month probe found the British drug maker offered bribes to doctors and hospitals in an attempt to boost sales. Investigators also found that the firm inflated drug prices to cover bribery expenses and reap high profits.

Reilly, the former head of GSK China, is alleged to have pressed his sales teams to bribe hospitals, doctors, and other medical institutions and reaped billions of Yuan in revenue. According to the state news agency Xinhua the company manipulated prices to disguise real costs. The actual cost of a box of Heptodin, which the news agency said was 15.7 Yuan was declared by GSK as 73 Yuan at customs and priced at 142 Yuan as factory price. Xinhua claimed the drug sells at about 18 Yuan in the Republic of Korea, 26 Yuan in Canada and 30 Yuan in the United Kingdom.

Healthcare is a highly sensitive area in China and has become a target for President Xi Jinping's attack on corporate graft, with a number of global and Chinese drug makers coming under the spotlight for corruption.

"GSK's practices eroded its corporate integrity and could cause irreparable damage to the company in China and elsewhere, " said Xinhua.

The firm’s revenues in China plunged 61 percent in the third quarter last year and were still down by 20 percent in the first quarter of 2014 from a year earlier.

The case is a warning to other multinationals in China that ethics matter. Authorities are reported to be making spot inspection visits on foreign drug firms.

"These investors should learn to respect the Chinese market, at the very least by providing quality products at reasonable prices, abandoning discrimination and honoring their due social responsibilities," warned Xinhua.

GSK itself has not been charged with any crime although it is widely believed that by charging Reilly authorities have left the option open for a charge against the firm. Any bribery charges against GSK could mean punitive fines and cancellation of its business licenses. That could cripple its operations in Asia's most promising growth market.

This is widely seen as the most serious corruption case against a senior executive of a major multinational firm in China and could be a wake-up call for foreign firms doing business in the country.

GSK has admitted that its own investigation unearthed evidence of wrongdoing but has insisted that the culprits worked outside the company’s control systems.

The last major corruption scandal to hit a foreign multinational in China involved the Australian mining conglomerate Rio Tinto in 2009, which resulted in four executives, including a Chinese-born Australian, being jailed for between seven and 14 years.

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