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Case Study: GSKs CHINA SCANDAL (2014) Lecture 6,

Wednesday 4th May 2016


In September 2014 the British former boss of GlaxoSmithKline in China pleaded
guilty to bribery-related charges in China and was given a three-year suspended
prison sentence. Mark Reilly (aged 52) had been barred from leaving China
throughout the previous year and was accused of overseeing a "criminal
godfather" scheme to bribe doctors, hospital staff and government officials to
prescribe GSK drugs with up to 300 millions worth of cash, resulting in the
creation of over 89 million of illegal sales.
Four other senior Chinese GSK executives were also handed suspended
sentences of between two and four years. The company was fined 300 million
after the court found that Britain's biggest drugs company had "offered money or
property in order to obtain improper commercial gains".
After the verdict GSK issued an "apology to the people of China" and said it had
"reflected deeply and learned from its mistakes". "GSK sincerely apologises to
the Chinese patients, doctors and hospitals, and to the Chinese Government and
the Chinese people. GSK deeply regrets the damage caused. GSK also apologises
for the harm caused to individuals who were illegally investigated by GSK China
Investment company."
The Boss.
Mark Reilly joined GSK in 1989 and worked in the UK, Singapore and Hong Kong
prior to his time in China. He was married and had two teenage daughters, the
family house in the south of England being worth around 1.2million. He had
obtained a PhD in pharmacology and neurosciences from University College

London. Mark originally went to work for GSK in China as a Finance Director, but
he was well-connected and trusted in Glaxos UK headquarters which led to his
promotion to Head of the China division.

Sex, Drugs and a Video Tape.


In January 2013 an email was sent to members of the GSK Board from someone
called the GSK whistleblower which highlighted concerns regarding GSKs
questionable sales practices in China. It was claimed these practices had been
occurring since January 2009.
Then in March, a sex tape was sent anonymously from the same email account
to board members, including Chief Executive Andrew Witty. The tape, filmed by
a secret camera, showed Mark Reilly having sex with his Chinese girlfriend in his
flat in China and it was believed that this was an attempt to threaten or
blackmail Mark Reilly. It was accompanied by an email which contained detailed
allegations of sales and marketing practices described as "pervasive corruption".
In May a further anonymous email was sent from the email account which again
laid out the series of corrupt sales and marketing practices.
GSK had launched an internal investigation in March but in June 2013 found no
specific evidence to substantiate the claims made in the emails.
The Sex Tape Investigation.
Once it had become public, Mark Reilly was given permission by GKS to use an
investigator, Peter Humphrey (aged 58), to find out who had hidden the camera
in his Shanghai flat and who had sent the two separate emails making serious
fraud allegations. The 20,000 investigation, codenamed Project Scorpion,
focused on a disgruntled former employee of GSK, Vivien Shi (aged 49), who was
a prominent businesswoman and whose family was part of Shanghais
communist elite. But a few months after starting to investigate Miss Shi, Peter
Humphrey was arrested along with his wife Yu Yingzeng, a US citizen and
daughter of one of Chinas most eminent atomic weapons scientists. They were
charged with having illegally bought and sold personal data of Chinese citizens.
Peter Humphreys arrest and detention in July 2013 was at around the same time
that China began a police probe into GSKs alleged bribery in their country.
Mark Reilly stepped down from his post as Head of the China Division soon after
Peter Humphreys arrest and returned to Britain (supposedly on vacation), but he
voluntarily went back to China within days to assist police with their inquiries.
After a lengthy investigation, he was charged in May 2014 of presiding over a
web of corruption and orchestrating whole departments of GSK staff to bribe
doctors and health-care organizations to boost sales of the company's drugs.
GSKs Response to the Scandal.
On announcement of the court verdict in September 2014, Andrew Witty, GSK's
chief executive, gave the following statement:
"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. 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."
The company said it had fundamentally changed the incentive programme for its
sales force, and increased the monitoring of invoicing and payments.
When the Chinese authorities began their investigation into the claims in 2013
Gao Feng, the head of China's fraud unit, said: "We found that bribery is a core
part of the activities of the company. To boost their share prices and sales, the
company performed illegal actions." GSK was alleged to have used a network of
more than 700 middlemen and travel agencies to bribe doctors, hospital staff,
government officials and lawyers with cash and even sexual favours. "There is
always a big boss in criminal organisations, and in this case GSK is the big boss.

QUESTIONS:
1. Why were employees at GSK in China engaging in unethical behaviour?
2. What do you feel about the reaction of the Chinese authorities to this
scandal?

Information for the Case Study is taken from the following sources:
How a secret sex tape plunged British drugs giant Glaxo into a 90 million
bribery probe, Daily Mail, 29/06/2014
China fines Glaxo 297 million for bribery, Mark Reilly sentenced Telegraph,
19/09/2014
GlaxoSmithKline ex-boss to be deported back to the UK from China, The
Guardian, 19/09/2014
GlaxoSmithKlines former China chief Mark Reilly charged with bribery,
Independent, 14/05/2014

Postscript: Three Ways to Understand GSKs China Scandal (taken from Forbes
website, 04/09/2013)
First, that the crackdown on GSK is part of the growing anti-corruption program
Chinese President Xi Jinping has set in motion. In August, two senior executives
of state owned enterprises (SOEs) were placed under formal investigation, the
most recent being Wang Yangchuan, the vice president of China National
Petroleum. This explanation can point to numerous and growing anti-corruption
initiatives Xi has rolled out since taking office, with the GSK scandal and its
associated allegations against other pharmaceutical companies as only more
recent and high profile examples.
The second way to understand the GSK scandal is specific to healthcare reform.
China is in the midst of a once-in-a-generation expansion of its healthcare
system. The country is making massive investments in every facet: new hospital
and primary care infrastructure is being built at a torrid pace, a national
insurance plan has been rolled out that covers almost everyone in the country,
providing increasing coverage for basic pharmaceuticals, devices and diagnostic
procedures. Yet most, if not all, of these additional investments are being built on
top of a weak foundation. Doctors are chronically over-worked and under-paid.
Hospital administrators struggle to meet shortfalls between government
reimbursement and the increasing costs associated with the levels of service and
medical products they are expected to provide.
It should be no surprise that both hospital administrators and doctors have found
alternative means to make up for the revenue not provided by the government.
For administrators, their response has been to incentivize doctors to prescribe
unnecessary pharmaceuticals, surgical procedures, and diagnostic evaluations.
Doctors have supplemented their paltry incomes through the sort of bribes the
GSK scandal has laid bare, as well as the back-channel red envelope payments
that families make directly to doctors to ensure proper and timely care. The
combination of these practices has created problematic inefficiencies within
Chinas healthcare system that must be dealt with if the massive additional
investment the countrys central government is making is going to be used
wisely and actually benefit the Chinese people.
Multinationals such as GSK did not create this environment; rather, they have
had to determine how to navigate the complex field where international
compliance standards overlap with how healthcare is consumed and paid for in
developing healthcare economies such as China. The realization that companies
such as GSK did not create this situation, but are bearing unequal blame for it
leads to the third, and most troubling way to understand the GSK scandal: China

is broadly becoming a less hospitable place for multinational companies to


operate.
Over the last several years, surveys of American and European companies with
significant investments in China have noted growing concern over what these
firms perceive as a less hospitable environment to make investments and grow
domestic market share. Many businesses believe they are being held to higher
regulatory standards by Chinas various ministries than are their Chinese
competitors, a frustration that is certainly not new but seems more explicit and
intense than in previous years. Chinas efforts to create a consumption and
service based economy, rather than simply a manufacturing one, reflect a fear
on the part of the countrys leadership that absent a domestic consumer
economy, the countrys growth could stall, with social and political fallout to
follow. While perfectly reasonable fears, the governments practices that have
followed this recognition have meant that domestic firms are being provided with
increasingly privileged positions over international companies.
When measured against these concerns, the GSK scandal takes on a different
and more troubling light. Whatever corrupt practices GSK is ultimately found
guilty of, the reality is that GSKs domestic competitors are guilty of much more
egregious behaviour. For this crackdown to be taken seriously, and for it to have
the right impact on the many inefficiencies that persist in Chinas healthcare
system, two things need to happen. First, Chinas regulators need to turn their
attention equally towards domestic players, and make sure multinationals see
that their competitors also be held accountable. Second, the reimbursement
practices that lead to chronic revenue shortfalls in hospitals, and the ongoing
poor pay for public hospital doctors need to be addressed. Without either
change, the only effect of the GSK scandal will be to push corrupt practices
further away from companies towards distributors and independent sales
representatives where businesses can claim they have no directly knowledge of,
or influence on, corrupt activities.
Pharmaceutical companies in particular have convinced themselves over the last
decade that they simply have to be in China. The combination of maturing
patents and price constraints in their home economies mean some of the
strongest prospects for revenue and profit are in China. Yet Chinas
pharmaceutical sector is undergoing a number of massive changes, the most
important of which has nothing to do with the GSK scandal and its various
explanations, but rather Chinas aspiration to accomplish within the life science
space what it has done in clean-tech. Chinas 12th Five Year Plan is explicit in its
desire to develop the life science sector. As part of this, China is going to
encourage international companies to partner with domestic Chinese academic
institutions, research parks, and industry. Much of this encouragement will take
shape around expectations for technology transfer, a necessary step if China is
to close the gap between what its life science sector is capable of today, and
where it hopes to see it evolve.
The idea that multinational life science companies have to be in China is not set
in stone. What could change it? If the GSK scandal applies disproportionately to
international companies, this sends a very clear signal that multinationals cannot
compete at the same level or in the same ways, as can their domestic
competitors. This forces multinationals into increasingly high end and specialty
market segments that, while profitable, do not represent the sort of high volume
opportunities that originally excited them. In addition, the concerted effort by the
Chinese government to encourage technology transfer within this sector will lead

to the competitive landscape shifting not only within China, but also in many of
the other emerging economies around the world, where Chinese competitors
could begin to challenge international players for market share.
China is not wrong to crack down on corruption. The countrys leadership is not
wrong to leverage multinationals for more cost effective inputs to its healthcare
system. But China needs to be careful that it does not overplay its hand, lest it
dis-incentivize the very industry players who have much to offer the Chinese
people in terms of disease management and quality of life.