Glaxo in China: History of a Crisis

Glaxo in China: History of a crisis

GlaxoSmithKline's chief executive Sir Andrew Witty has admitted that four executives in China appeared to work around the company's control systems to behave in a "clearly inappropriate and illegal" way. Here's how events unravelled.

February China’s industry regulator contacts drug makers operating in China to ask about pricing.

June 13 Reports emerge that GSK is investigating allegations that staff bribed doctors with lavish gifts to prescribe drugs. GSK issues a statement to say it has found no evidence to support them after a detailed investigation.

June 27 Police raid Glaxo’s China headquarters in Shanghai and seize documents.

June 28 A regional police department in city of Changsha posts statement that certain individuals at GSK are under investigation for “economic crimes”.

July 5 China’s price regulator launches investigation into costs of medicines at 60 domestic and international drug makers, including GSK.

July 11 Chinese Ministry of Public Security issues says four GSK executives have “confessed” to unspecified economic crimes while being questioned by police.

July 15 China’s top official in charge of economic crime details charges against GSK, alleging that 3bn renminbi had been paid in bribes since 2007 via a network of 700 conference organisers.

July 16 One detainee appears on state television to confess to bribery.

July 19

Sir Andrew Witty, chief executive, dispatches emerging markets head Abbas Hussain to lead negotiations. It emerges GSK's internal probe has uncovered evidence that four detained executives were involved in orchestrated attempt to falsify invoices, pay sweeteners to third parties and siphon off payments for their own use. GSK also hires Ernst & Young to conduct independent inquiry.

July 21

It emerges that GSK has briefed Britain's Serious Fraud Office, Downing Street and the Foreign Office over the situation.

Ten individuals are detained in relation to the scandal, including a British consultant who specialises in fraud investigations in China, Peter Humphrey. He is understood to have been a contractor for GSK in the past.

July 22

Abbas Hussain issues statement admitting that individuals appear to have "acted outside our processes and controls which breaches Chinese law". He adds that GSK will support the Chinese authorities in reforming the medical sector and pledges that the company would lower its prices to make its medicines more affordable in the country.

Mr Hussain is said by Chinese authorities to have apologised for the scandal.

July 24

Sir Andrew Witty, chief executive, admits that four executives appear to have worked around GSK's control processes to commit the alleged wrongdoing. He refuses to accept personal responsibility for the scandal, and insists that he remains confident in Glaxo's compliance systems worldwide.

He says the company will commission an independent review to find out what happened.

Bribes, Sex, Fraud! Did Glaxo Violate Its Corporate Integrity Agreement?

The ongoing scandals that GlaxoSmithKline faces in China – bribes involving senior execs and clinical trial failures in R&D - have caused some investor anxiety, but the shares have mostly traded in the same narrow range since these episodes erupted (back stories here, here and here). Although Glaxo execs say it is not possible to estimate the financial impact. China generated in the low single digits percent of total company revenue.

But there is one way in which this mushrooming controversy could cause Glaxo serious trouble. As part of its $3 billion settlement last year to resolve civil and criminal charges of selling drugs for unapproved uses and withholding clinical trial data, among other things,(read more here) the drugmaker signed a corporate integrity agreement, which required creating an internal compliance program to monitor business practices (here is the CIA).

A violation could lead the US Department of Health and Human Services Office of Inspector General to seek to exclude the drugmaker from contracts with federal healthcare programs, such as Medicare and Medicaid. This is big business, of course, and so any whiff of trouble that could impact the CIA has investors on alert.

On a conference call this morning to discuss the latest earnings, Glaxo ceo Andrew Witty was asked whether Glaxo staff believe the scandals in China would have an effect on the CIA, since it is known that US authorities are probing the drugmaker for violations of the Foreign Corrupt Practices Act (this is the law) and the UK's Serious Fraud Office is also conducting a probe. Witty, however, breezed past the question without offering a response.

We asked the HHS OIG, and this is what a spokesperson provided us: “Our CIAs focus on US laws, especially those relating to Federal health care programs (including Medicare and Medicaid.) However, if conduct that happened overseas also violated applicable US laws, we would assess whether the situation implicated any CIA provisions.”

In other words, an impact cannot be ruled out.

To what extent, if any, the worst-case scenario for Glaxo might occur – exclusion from dealings with federal health care programs – remains unclear, of course. Although the feds are loathe to pursue an entire company, especially a large drugmaker that sells a plethora of medicines that, in some cases, may not be easily afforded or obtained from other suppliers. This would hurt purchasers and patients.

Just the same, the prospect that the feds are keenly aware of the circumstances understandably has the drugmaker on edge, and this will likely be the case for some time, especially as Glaxo (GSK) operations are put under a microscope in other locales. Perhaps the feds would seek to exclude an executive or two instead of the entire company. For now, though, investors may not want to be entirely sanguine about the outcome.

ChinaGate: Glaxo Issues A Mea Culpa And AstraZeneca Is Questioned

More bad news for GlaxoSmithKline. Over the weekend, the embattled drugmaker found itself scrambling on several fronts to contain the damage from a bribery scandal in China. Abbas Hussain, Glaxo president of international operations (pictured left), who met with Chinese authorities, issued a formal statement admitting that "certain senior execs" in the Chinese unit "acted outside of our processes and controls, which breaches Chinese law." And to appease the Chinese, he adds that certain chainges to be made to operations there will result in lower prices on medicines.

At the same time, the drugmaker has reportedly met with investigators from the US Serious Fraud Office, which has the authority to investigate such allegations both at home and abroad. On Wednesday, Glaxo will release its quarterly earnings and ceo Andrew Witty is widely expected to address the mess, although a spokesperson declined to answer to say whether he will eventually meet with Chinese authorities himself. Meanwhile, the drugmaker reportedly sacked dozens of sales reps in China dating back to early last year in response to the bribery scandal, which the drugmaker initially denied but was publicized thanks to an internal whistleblower.

And now, the proverbial other shoe is falling. An AstraZeneca (AZN) spokesperson confirms to us that Chinese authorities have visited its offices in Shanghai and questioned at least one employee, a sales rep, who has not yet been identified, and several other drugmakers, including Merck (MRK), Roche and Novartis NVS), have reportedly done business with the Shanghai Linjiang Travel Agency, which Glaxo allegedly used to funnel payments. In fact, the agency has reportedly been closed by authorities. As noted previously, the probe was expected to spread to other drugmakers and so far, UCB and Baxter International have also been named as on the list of drugmakers that are being eyed by Chinese investigators.

The developments underscore the extent to which this crisis is as severe as the $3 billion fine that Glaxo paid last year to resolve criminal and civil charges in the US for marketing drugs for unapproved uses and withholding clinical trial data, among other things (back story). That capped an extended period in which Glaxo lost credibility, making the events in China a fresh embarassment to Witty, who vowed to restore some integrity to the Glaxo name by revamping procedures. While cultural differences are usually cited to explain the bribery scandal, the 'Wild West' activities were to have been overseen by Glaxo execs, who are supposed to be well versed in compliance matters.

For now, Glaxo is the poster boy for bad behavior in China, but given the interest that Chinese authorities have indicated in other drugmakers, the pharmaceutical industry is, effectively, on notice that bribery and other improper practices can cause trouble. Although some speculate the Chinese are motivated to use this episode to bolster its own domestic drugmakers or lower the price of medicines - another matter being probed - the motivations will not excuse drugmakers if they are found to have conducted themselves inappropriately.

Here is the full statement, by the way, from Glaxo's Hussain: "We have had a very constructive meeting with the Ministry of Public Security, and we are very grateful for their time. GSK is taking this situation extremely seriously and that is why we are here. Certain senior executives of GSK China who know our systems well, appear to have acted outside of our processes and controls which breaches Chinese law. We have zero tolerance for any behaviour of this nature.

“I want to make it very clear that we share the desire of the Chinese authorities to root out corruption wherever it exists. We will continue to work together with the MPS and we will take all necessary actions required as this investigation progresses. We fully support the efforts of the Chinese authorities in their reforms of the medical sector and stand ready to work with them to make the changes for the benefit of patients in China.

"We will actively look at our business model to ensure we make a significant contribution to meeting the economic, healthcare and environmental needs of China and its citizens. In addition, savings made as a result of proposed changes to our operational model will be passed on in the form of price reductions, ensuring our medicines are more affordable to Chinese patients."

Glaxo Dismisses Exec Over Fabricated Data & Retraction Is Sought

After conducting an internal investigation, GlaxoSmithKline has determined that a scientific paper that was published in Nature Medicine contained fabricated data and has dismissed Jingwu Zang, one of the listed authors, who was a senior vp and head of R&D in Shanghai, China, and seeking a retraction, a spokeswoman confirms. For now, his responsibilities have been assigned to others at the site.

Glaxo (GSK) has also placed three other employees on administrative leave pending a final review and a fifth has resigned, the spokeswoman acknowledges. She adds that the drugmaker is in the process of asking all the authors to sign a statement to that effect, which is the procedure the journal requires. We have asked Nature for comment and will update you accordingly.

The paper, which appeared three years ago, examined the role of a protein called Interleukin-7 receptor in treating autoimmune disease. The existence of the internal probe became known 10 days ago after blogs in China wrote about the development and we have subsequently learned that BioPharm Insight reported last week that Zang was suspended [EDITOR'S NOTE: In our previous story, we noted an unnamed employee was placed on administrative leave.]

“We've now established that certain data in the paper were, indeed, misrepresented. We’ve shared our conclusion that the paper should be retracted and are in the process of asking all the authors to sign a statement to that effect, which is the procedure the journal requires,” the spokeswoman writes us, adding the drugmaker “is committed to the highest ethical and scientific standards… in this instance, our standards were compromised.”

Zang, by the way, was issued a warning letter by the FDA in 1999 for administering experimental treatments to patients without filing an IND, or Independent New Drug application (here is the letter).

This is the second time in recent weeks that a global drugmaker has begun an internal probe over published studies involving employees. Novartis recently admitted that two employees in Japan had varying levels of involvement in clinical trials for its Diovan heart drug, which were initiated by investigators but were supposed to have been independent.

Glaxo Was The 'Godfather' Of The Chinese Bribery Scandal

Another day, another set of damaging details emerges about the GlaxoSmithKline bribery scandal in China. Chinese authorities have now released the names of four senior execs – all of whom are Chinese nationals – who are being detained and noted that the drugmaker used some 700 middlemen, such as travel agents, to funnel hundreds of millions of dollars to doctors and health officials to boost prescriptions of its drugs.

“From our investigation, bribery is part of the strategy of this company. This is why they have bribery activities in China," said Gao Feng, head of the economic crimes investigation unit at the Ministry of Public Security, according to The Telegraph.

"We could not find the evidence [of corruption] in their accounts. They used travel agents as a money platform. But I must make it clear that among these partners, GSK is the main party responsible. It is like a criminal organization, there is always a boss. In this game, GSK is the godfather.” He noted the drugmaker is also being investigated by US authorities for potential violations of the Foreign Corrupt Practices Act.

The incident, which also reportedly involves ‘sexual favors’ offered to Glaxo execs by various travel agencies, has greatly embarrassed the drugmaker and will likely hinder efforts to restore its reputation after paying a $3 billion fine last year to the US government for civil and criminal charges stemming from marketing practices and withholding clinical trial data, among other things.

The investigation, which Chinese authorities say was not sparked by a Glaxo whistleblower (back story), may eventually implicate other drugmakers as well, since Chinese authorities have been combing through travel agency records and reportedly found indications that some agencies were doing outsized business with multiple pharmaceutical companies.

Among the Glaxo execs who have been arrested are Zhao Hongyan, 41, legal counsel and head of compliance; Liang Hong, 49, a vice president in charge of operations; Huang Hong, 45, a general manager in charge of commercial development and Zhang Guowei, 50, human resources director. The foursome was once dubbed China’s. "quadriga.”

However, Mark Reilly, who heads Glaxo operations in China, reportedly left the country on June 27, as the investigation was heating up and has not returned. “You better ask him yourself why he has left China and is not willing to return so far,” Gao told a news conference. “We did not take any measures to stop his departure.” We asked Glaxo about his departure and whether Chinese authorities have asked to interview him as part of the investigation, and will update you accordingly.

The scheme allegedly involved travel agencies, such as Shanghai Linjiang Travel Agency, that arranged conference services and then paid kickbacks to Glaxo execs that included money and sexual favors, according to media reports.

The agency “was only keeping contact with some pharmaceutical enterprises and hardly doing ordinary tourism business. However, its annual turnover has surprisingly surged from several million yuan at its start-up period in 2006 to about a hundred times the figure at present," a police officer from the investigation team told the Xinhua News service.

Weng Jianyong, a corporate representative of the Linjiang Travel Agency, told Xinhua that he had a tacit agreement with Liang, who would offer opportunities to arrange conference services, and that some of the payments to his agency would be given to Liang as kickbacks. Since 2010, the bills nearly $.9 million and the kickback for Liang was about $325,000 at today’s rates.

In an interview with Xinhua, Liang reportedly acknowledged supervising about 3,000 medical representatives across China to deal with hospitals and doctors, and admitted that he had been "in contact with" senior government officials and medical experts. He was authorized to approve an annual budget up to hundreds of millions of yuan, the news service writes.

Liang took some of the money and the rest was left to Weng to cover Liang's "non-reimbursable expenses." Weng confessed that Liang had told him that such "non-reimbursable expenses" are generally used as bribes to officials and experts. "Sometimes, Liang tells me his bribery purposes over the phone and I prepare the money and deliver to the relevant person," he told Xinhua.