(Updates with analyst comment in sixth paragraph.)
May 14 (Bloomberg) -- Chinese police handed a bribery case against GlaxoSmithKline Plc’s China unit to prosecutors, accusing a British executive of ordering employees to illegally pay doctors, hospitals and medical associations to boost sales.
Mark Reilly, a British national who previously led GSK’s China unit, allegedly helped set up and expand sales departments that offered the bribes, a Ministry of Public Security official said at a briefing in Beijing today, declining to identify himself. Glaxo in an e-mailed statement said it will continue to fully co-operate with the authorities.
China’s probe of Glaxo has hurt the drugmaker’s sales in the country and spurred changes in how the company markets drugs. The accusations against Reilly mark the first time the Chinese government has laid out specific allegations against a foreign employee of the U.K.’s largest drugmaker in the probe.
“To go for an expat leader of a big company, the Chinese government is showing that they’re upping the ante,” said Kerry Brown, a professor of Chinese politics at the University of Sydney and a former British diplomat in Beijing. “It shows a Chinese government that’s very aware of how important their domestic market is, and they’re saying: ’You come here on our terms or face the consequences.’”
The government scrutiny was extended to other foreign drugmakers and local hospitals after the security ministry detailed the Glaxo allegations last year. China’s government has probed other foreign companies and sectors in the past. In August it fined six infant formula companies including Mead Johnson Nutrition Co. and Danone a combined 669 million yuan for price fixing. Four Rio Tinto Plc executives pleaded guilty in 2010 to receiving 92 million yuan in bribes.
“Many companies doing business in China are vulnerable to the same treatment,” said Erik Gordon, a lecturer at the University of Michigan’s School of Law and a professor at its Ross School of Business.
Reilly headed the company’s China unit until last year. A man who picked up his China-based mobile phone said Reilly was in a meeting and had no comment. The man hung up the phone when asked to identify himself. Reilly is still in China, the ministry official said, without further details about his whereabouts.
The executive left the country after some Glaxo employees were detained in June. In July, Glaxo said Reilly would assist the police in the bribery probe after returning to China. “We are aware of recent developments in the case but cannot comment whilst it is still ongoing,” a spokesman for the U.K. embassy said in an e-mail. “We are in close contact with GSK.”
In June, Chinese authorities began investigating allegations that Glaxo had funneled money through local travel agencies to pay bribes to doctors in return for prescribing its drugs. They last year detained some executives on suspicion of economic crimes involving 3 billion yuan of spurious expenses and trading in sexual favors.
The allegations are deeply concerning and contrary to the company’s values, Glaxo said in today’s statement, adding that it wants a resolution that will enable it to continue contributing to the welfare of China’s citizens. Glaxo said in December it was changing the way it compensates salespeople and would stop paying doctors for giving speeches and attending medical meetings.
A campaign to drive down drug prices may be behind the probe as President Xi Jinping has made affordable health care a key part of the Communist Party’s agenda. Glaxo has already pledged to pass on savings from operational changes made in China in the form of cheaper medicines.
“As far as Glaxo’s concerned it doesn’t really get us any further in terms of what sanctions will be applied to the company, whether it will be large financial penalties, any constraints on doing business,” said Mark Clark, an analyst at Deutsche Bank AG in London. “There’s nothing that takes us any further here, all it does it talk about individuals.”
The three allegations against Glaxo’s Chinese unit included corporate bribery, bribing non-government personnel and offering bribes to Chinese work units, the ministry official said today. Two other executives, Zhang Guowei and Zhao Hongyan, were also suspected of bribing officials with the industry and commerce departments of Beijing and Shanghai, the official Xinhua News Agency said.
Reilly, Zhang Guowei and others used sales departments to bribe doctors and hospitals to sell the drugs, in order to fulfill high sales targets set by headquarters, according to Xinhua. This brought in billions of yuan in illegal revenue as drug prices were artificially increased to cover bribery costs, it said.
Glaxo also paid bribes in an effort to obstruct Chinese investigations, the security ministry official said.
--With assistance from Li Liu in Beijing and Simeon Bennett in Geneva.