Glaxo Faces Criminal Probe After China Bribery Allegations

May 28, 2014 12:13 pm ET

(Updates with closing share price in seventh paragraph.)

May 28 (Bloomberg) -- GlaxoSmithKline Plc faces a criminal probe in the U.K. after allegations in China that the drugmaker’s employees bribed doctors, hospitals and medical associations to boost sales.

The Serious Fraud Office “has opened a formal criminal investigation into the group’s commercial practices,” London- based Glaxo said in a statement late yesterday. “GSK is committed to operating its business to the highest ethical standards and will continue to cooperate fully with the SFO.”

The probe adds to pressure on Glaxo Chief Executive Officer Andrew Witty. Since China began its investigation in June, allegations have surfaced of wrongdoing by company employees in Iraq, Poland, Jordan and Lebanon. The U.S. Justice Department began looking in 2010 into whether Glaxo and several other drugmakers violated a law against bribing officials in foreign countries.

Glaxo won’t comment beyond the statement, David Mawdsley, a spokesman, said by e-mail. He declined to say whether the U.K. probe involves China. The fraud office confirmed in a statement that a criminal investigation is under way, without providing any details.

Possibly ‘Procedural’

The investigation may be procedural because any allegation of wrongdoing needs to be investigated, Stephen McGarry, an analyst at Societe Generale in London, said in a report to investors. Glaxo may also be able to escape harsh penalties if it can prove it has strong anti-bribery policies and the actions were committed by rogue employees, he said. Still, the news won’t be good for the stock, he said.

Although “GSK may not have a major financial liability from any U.K. and/or U.S. investigation, the headline alone, especially if the U.S. launches an investigation, may restrain GSK’s share price performance,” McGarry wrote.

Glaxo fell 1.6 percent to 1,608.50 pence in London trading, its biggest decline since April 30.

Chinese police on May 14 handed a bribery case against Glaxo’s China unit to prosecutors. Mark Reilly, a British national who previously led the unit, allegedly helped set up and expand sales departments that offered the bribes, the Ministry of Public Security said.

Chinese Investigation

Chinese authorities began investigating allegations in June that Glaxo had funneled money through local travel agencies to pay bribes to doctors in return for prescribing its drugs. They detained some executives last year on suspicion of economic crimes involving 3 billion yuan ($480 million) of spurious expenses and trading in sexual favors.

Glaxo informed the U.K. serious-fraud investigation body, as well as the U.S. Department of Justice and Securities and Exchange Commission, about the Chinese probe, the company said in its quarterly report.

“The SFO really have no option but to investigate this,” Andrew Oldland, a lawyer at Michelmores in London who advises clients on anti-bribery laws, said in a phone interview. “I rather suspect that they’ve been slightly driven to it, where you’ve got a company of that size that’s a U.K. company that has issues in more than one jurisdiction: China, Poland, Iraq and other places.”

Penalty Range

If the U.K. office’s investigation results in a prosecution, there could be a deferred prosecution agreement, in which Glaxo would pay a fine and potentially be put on probation for about five years, said Oldland, who has been counsel for the SFO.

“If it went to court and they decided the corruption was sufficiently bad that it really needs to be dealt with in court, there are quite stringent guidelines” coming into force later this year for fines based on revenue, he said.

Witty vowed in 2012 to clean up Glaxo, the U.K.’s largest drugmaker, after the company paid a record $3 billion fine in the U.S. to settle criminal and civil charges. The pharmaceutical producer improperly promoted drugs and failed to report safety information, the U.S. found.

In 2011, with the U.S. investigation under way, Glaxo revised its incentive compensation program for U.S. sales representatives, saying it had done away with the link between sales goals and bonuses.

In December 2013, after the Chinese investigation began, Glaxo said it planned to stop direct payments to doctors for giving speeches and attending medical meetings by early 2016.

Glaxo will also introduce a new compensation program for sales representatives outside the U.S. who deal directly with those who prescribe medicines.