BioPharm Executive: Bribery, Fraud, Deceit--Just Another Day in Pharmaland

Published: Jul 31, 2013

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July 31, 2013

Bribery, Fraud, Deceit--Just Another Day in Pharmaland

In our last issue, I mentioned in the Legal Briefs section that there was an emerging scandal at GlaxoSmithKline in China. Since then, all hell has broken loose as this has spun into an international story involving sex, drugs, bribery, and deceit. It's really been pretty amazing, from the travel agencies allegedly used to launder money to the reports of "sexual favors" offered in return, to charges from an official at the Ministry of Public Security that GSK is the "godfather" in "a criminal organization." Then there's the remarkable revelation that GSK's vice president and operations manager in China, Liang Hong, appeared to admit to much of the company's scheme in an interview during a state-run broadcast.

The mounting story has of course been widely reported, so I won't hash through all the details again. But there are a few interesting details that make this story instructive for industry watchers and anyone wondering how the global pharma industry is evolving.

Ever since Watergate, we've all known Howard Baker's drill for scandal investigation: "What did [insert name] know, and when did he know it?" Any investigator knows you need to chase things as far up the food chain as you can go. So far, in addition to the high-ranking Chinese nationals who have been detained by the Chinese government, there have been a couple of Westerners: Peter Humphrey, a British independent fraud investigator who reportedly worked for GSK, and an unnamed American. But it's worth noting that General Manager Mark Reilly, GSK's top exec in China, left the country in early July after the first government raid, while vp of Finance for China, Steve Nechelput, another British national, has since been restricted from leaving the country. Neither has been charged with anything, so there's no reason to jump to any conclusions, but you can be certain that investigators both in and out of China will want to know what if anything extended beyond the local organization.

Don't get me wrong--it is extremely unlikely that this kind of extensive bribery scheme was condoned by the home office. But it certainly looks like top management didn't do enough to prevent it, nor did they take it seriously enough when first presented with evidence of the problem.

And it's not like they shouldn't have suspected there could be trouble. According to a recent study by Transparency International, Chinese companies are more likely to get business done through bribery than those from any other nation apart from Russia. That's hardly lost on the executives whose business it is to make the China division successful, whether they were hired locally or came in from the outside. And if this is how business is done...if this is how your competitors are doing business...what are you going to do?

Look at recent history. Last summer, Pfizer paid the U.S. government $60 million to settle charges that it paid millions in bribes over a decade or more to build its business in China and eastern Europe. In 2011, Johnson & Johnson paid $70 million to settle criminal bribery charges (admitting wrongdoing in the criminal case but--surprise, surprise!--not in the civil case) in eastern Europe and Iraq. In 2010 Merck, AstraZeneca, Bristol-Myers Squibb, Eli Lilly, and Baxter International all disclosed bribery investigations. When companies enter markets where bribery is de rigeur, guess what happens? And China, of course, is an immense and immensely important market for the pharma industry. It's also a relatively new market that even large multinationals don't have a lot of experience in.

GSK, of course, should have been especially alert, considering the record $3 billion fine last year settled charges of fraudulent promotion of drugs like Paxil and Avandia, as well as bribery. At the time, GSK CEO Sir Andrew Witty said the company had "learnt from the mistakes that were made" (note the passive voice) and said the company was henceforward "displaying integrity in everything we do." It seems that last message may not have trickled down. Perhaps some execs in China somehow got the idea that this is how business is done at GSK?

Now the company is open to a world of hurt. I mentioned Pfizer's and J&J's past settlements with the government on bribery charges--in both those cases, at least, it was the companies that initially disclosed the wrongdoing. GSK, on the other hand, was anonymously tipped off in January and claimed to have investigated and "found no evidence of corruption or bribery," despite later acknowledging the facts behind nearly identical charges brought by the Chinese government.

This opens up the company to prosecution under the Foreign Corrupt Practices Act. It's even possible that the company will be considered to have violated the Corporate Integrity Agreement forged in last year's settlement, which could theoretically cut the company off from dealing with federal healthcare programs like Medicare and Medicaid--something that would be devastating to the company.

Ultimately, I wouldn't be surprised to see Congress taking up the larger issue of foreign bribes. Because the problem is much larger than GSK or even the pharma industry. Dozens of companies are under investigation by the SEC or the DOJ for violating the Foreign Corrupt Practices Act. High profile investigations in recent months have involved everyone from Wal-Mart to DreamWorks. Most companies try to stop it from happening, but admit they can't control employees with a strong incentive to bribe. Some even nakedly paint it as a competitiveness issue--if they follow U.S. law, they will lose out to competitors. Difficult as it may be, companies need to work harder to prevent, detect, dismantle and--if necessary--disclose these schemes. (Sanofi, Novartis, Merck and Roche have all recently acknowledged they used the same travel agency as GSK, trying to get ahead of a potential problem.) GSK doesn't seem to have quite gotten this yet. And if a $3 billion settlement didn't focus their attention, it's hard to know what will.

-Karl Thiel

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