GlaxoSmithKline (GSK) has been fined almost $500 million by a Chinese court that also meted out prison sentences to five former executives of the pharma giant, including the onetime head of its operations in China.
Changsha Intermediate People’s Court in Hunan Province imposed a fine of 3 billion yuan renminbi (approximately $488 million) in ruling that GSK was guilty of offering money or property to nongovernment personnel in order to obtain improper commercial gains, as well as bribing nongovernment personnel. Following a “closed-door” or secret trial, the court concluded that the company “resorted to bribery to boost sales of its medical products and sought benefits in an unfair manner,” according to China’s state-run news agency Xinhua.
“(GSK) bribed, in various forms, people working in medical institutions across the country, and the amount of money involved was huge. Five senior executives actively organized, pushed forward and implemented sales with bribery,” the court declared in a statement quoted by Xinhua.
The fine was the largest ever levied by a Chinese court, Xinhua reported.
GSK has been under Chinese state scrutiny for more than a year, since officials charged GSK in a money-and-sex scandal. The company and executives were accused of funneling up to RMB 3 billion ($488 million) to travel agents, using the money to bribe physicians, hospitals, and government officials to or “cater to their pleasures,” as Xinhua delicately put it, as well as inflating drug prices and committing tax fraud.
The activities generated more than $150 million in illegal sales, authorities said in May, when indictments were handed up against three of the five former executives in May.
“GSK plc fully accepts the facts and evidence of the investigation, and the verdict of the Chinese judicial authorities. Furthermore, GSK plc sincerely apologises to the Chinese patients, doctors and hospitals, and to the Chinese Government and the Chinese people,” GSK stated in an apology published in Chinese and English on its Chinese website.
GSK is one of about 60 biopharmas under investigation for pricing policies as of July 2013
The court sentenced Mark Reilly, former manager of GSK China Investment Co. Ltd (GSKCI) and a subject of the U.K., to three years in prison, a four-year reprieve from what would have been the rest of his sentence, and expulsion from China.
Also sentenced were GSK’s former business development manager Huang Hong, who received three years in prison with a four-year reprieve for giving and receiving bribes; while three other former company executives were sentenced to between two and three years each, with reprieves of two to three years. The three were Zhang Guowei, former human resources director; Liang Hong, former vice president and operation manager; and Zhao Hongyan, former legal affairs director.
Sentences for all five were reduced since they confessed the facts truthfully and were considered to have given themselves up to authorities, according to the Xinhua report. The five have all opted not to appeal their sentences.
In a statement following the Chinese court ruling, GSK said it “has co-operated fully with the authorities and has taken steps to comprehensively rectify the issues identified at the operations of GSKCI.”
Those steps, according to GSK, include changing its incentives for salespeople by decoupling sales targets from compensation; “significantly” reducing and changing engagement activities with healthcare professionals; and expanding its processes for review and monitoring of invoicing and payments.
“Reaching a conclusion in the investigation of our Chinese business is important, but this has been a deeply disappointing matter for GSK. We have and will continue to learn from this,” CEO Sir Andrew Witty said in the company’s statement. “GSK has been in China for close to a hundred years and we remain fully committed to the country and its people. We will continue to expand access to innovative medicines and vaccines to improve their health and well-being.
“We will also continue to invest directly in the country to support the government's health care reform agenda and long-term plans for economic growth,” Witty added.
GSK’s sales-pay reforms also reflected efforts to prevent legal problems such as those that compelled the pharma giant to plead guilty and pay a $3 billion to the U.S. Department of Justice. In 2012, the company settled charges that it promoted its Paxil and Wellbutrin antidepressants for unapproved uses, and failed to report safety data about the diabetes drug Avandia.
Witty has not gone unscathed in the Chinese scandal; he lost $410,000 he would otherwise have received in bonus pay as a result of the Chinese investigation of GSK activities, which resulted in an 18% year-over-year drop in pharmaceutical and vaccine sales in China.
China’s prosecution of GSK has raised concerns by multinationals in and outside biopharma that the country will discourage their expansion there going forward in favor of domestic industry. Officials sought to ease those concerns earlier this month: “The opening-up principle will stay unchanged for a long time, the investment cooperation framework become increasingly accommodative, and the law enforcement non-discriminatory,” Chinese vice premier Wang Yang said earlier this month in a speech to the 18th China International Fair for Investment and Trade, in remarks reported by Xinhua
Intermediate courts are the middle of three levels of local courts in China, with responsibilities that include trying criminal cases committed by foreigners, or “major foreign-related cases” as specified by the Law on Civil Procedures, according to the China Internet Information Center, the authorized government portal site published under the auspices of the State Council Information Office and China’s largest foreign-language publishing organization the China International Publishing Group.
The Xinhua report did not say why the trial of the former GSK executives was closed. Under Chinese civil procedure law, cases involving trade secrets may, upon request by litigants, not be open to the public—the same status as cases involving state secrets, personal privacy, or crimes committed by minors.