Advertisement

GSK experiencing a little local difficulty in China

Four GSK executives have been detained amid fraud allegations. Photo: Reuters

It's a knock on the door that no multinational company wants: A visit from the Chinese authorities, armed with allegations executives have been involved in corruption, and determined to get to the bottom of exactly what has been going on.

That is what has happened to GlaxoSmithKline (GSK), one of our biggest drug companies in the last couple of weeks.

Today, the Chinese authorities claim executives have 'confessed', and one of the businesses most senior managers has not done that, but the firm has accepted that "certain executives appear to have acted outside our processes and controls."

In a world where business reputation matters more and more, it is potentially a very serious problem for the company, just a year after it paid a fine of three billion dollars in US, as part of the largest healthcare fraud case of its kind to date.

The allegations are that Glaxo executives, four of whom have been detained, colluded with travel agencies to overcharge for events or trips, and then split the cash for their own gains, with some of the money then allegedly finding its way to the pockets of government officials or doctors who prescribe drugs.

No one has yet been charged, and the company is a long way from accepting the charge sheet, but it has shifted position in the last twenty four hours and acknowledges that it does look like something was awry.

With the company's results on Wednesday, it is an awkward time for the boss, Sir Andrew Witty, to have to admit any failings.

GSK says they are taking the matter extremely seriously, and has promised to work closely with the Chinese authorities to understand what has happened.

They are not just promising cooperation with the investigation, but have also promised today to cut the cost of drugs they sell there. The Chinese government has a renewed focus on cracking down on corruption, but also an interest in cutting the cost of healthcare.

But one industry insider told me they would be "shocked if GSK is the only company involved."

Astra Zeneca, another huge pharmaceutical company, had a visit from the Shanghai Public Security Bureau on Friday. The authorities have also been in touch with the Belgian drug maker, UCB, who said they had been contacted as part of a larger investigation involving other drug companies.

Although the government is desperate to encourage British businesses to export more to China, the world's second biggest and fast growing economy, one source said, "it is terribly difficult and tricky to operate there."

This case, with what appears to be a pattern emerging, could just have made it even harder.