July 18 (Bloomberg) -- GlaxoSmithKline Plc’s finance chief in China is unable to leave the country as local authorities investigate allegations of economic crimes at the maker of the world’s top-selling drug.
The travel restriction was imposed at the end of June, Simon Steel, a Glaxo spokesman in London, said yesterday by phone. Steve Nechelput, the executive, hasn’t been questioned or arrested and isn’t being detained, he said. The British embassy is providing the British national with consular assistance, John Gallagher, a Beijing-based spokesman, said by phone.
Glaxo has had four of its senior executives detained amid an investigation involving 3 billion yuan ($489 million) of spurious travel and meeting expenses, and trade in sexual favors, China’s Public Security Ministry said July 15. Mark Reilly, who has led the London-based company’s business in China since 2009, left the country on June 27 after his colleagues were detained, the ministry said.
“This could be the government killing the chicken to scare the monkeys, using the GSK case to send a signal to pharmaceutical companies to say ‘maybe it’s time to stop this type of practices,’” said Yanzhong Huang, senior fellow for global health at the Council on Foreign Relations in New York and author of the book, Governing Health in Contemporary China. “This case just represents the tip of the iceberg.”
Reilly returned to the U.K. on a routine, planned business trip and has been working from Glaxo’s headquarters on the response to the probe, a person with knowledge of the matter said July 15. The person, who asked not to be identified because he wasn’t authorized to speak on the subject, declined to say when or whether Reilly will return to China.
The company hired Ernst & Young LLP to conduct an independent audit, the Financial Times reported. Terence Ng, a Hong Kong-based media relations manager at the auditor, declined to comment on the report.
Glaxo faces a review from the U.K.’s Serious Fraud Office, the Wall Street Journal reported, citing people familiar with the matter. Susan Givens, a spokeswoman for the fraud office, said she couldn’t confirm or deny the report. Garry Daniels, a Singapore-based spokesman at Glaxo, declined to comment today.
Separately, Glaxo said Chief Executive Officer Andrew Witty will step down from his role as non-executive director at the U.K. Department for Business, Innovation and Skills. The decision isn’t related to the probe in China, the company said yesterday.
“Andrew’s three-year term at BIS is due to finish at the end of 2013, so as always planned he will be stepping down at that point,” Glaxo said.
State broadcaster China Central Television aired a prime-time segment on July 16 detailing how executives at the U.K.’s largest drugmaker used a travel agency to funnel bribes to government officials.
The CCTV report featured Liang Hong, operations manager for Glaxo China, explaining how executives passed bribes to drug regulators, pricing officials at the National Development and Reform Commission and hospital officials. Liang is among the four Glaxo executives in police custody, CCTV reported.
The allegations are “shameful” and would be a breach of internal systems and values, Glaxo said in a statement.
Efforts to clean up the nation’s $350 billion health-care industry have gained prominence since police said last month they were investigating Glaxo for suspected economic crimes. Yesterday, the China Food and Drug Administration said it will “severely crack down” on fake medications, forged documents and bribery.
China’s drugs regulator will conduct a crackdown from July to December, Yan Jiangying, a spokeswoman for the agency, told reporters at a briefing in Beijing yesterday.
Recent investigations have so far implicated Glaxo, though other foreign companies may also be involved, Gao Feng, head of the economic crimes investigations unit of China’s Public Security Ministry, told reporters at a July 15 briefing.
Glaxo makes the asthma treatment Seretide, the world’s top-selling drug last year, according to IMS Health Inc.
At least four multinational drugmakers are facing probes by local anti-corruption units in China, according to Wendy Wysong, the head of anti-corruption practice in the Asia-Pacific region at law firm Clifford Chance. No other foreign drug company apart from Glaxo has been named so far by Chinese authorities in connection with the investigation.
Novartis AG, Europe’s biggest drugmaker by sales, hasn’t been contacted by Chinese authorities with regards to the bribery probe, Joe Jimenez, the Basel, Switzerland-based drugmaker’s chief executive officer, said on an earnings call with reporters yesterday.
AstraZeneca Plc, the biggest U.K. drugmaker after Glaxo, said in its 2012 annual report that it is investigating indications of inappropriate conduct in countries that include China. The company has no update yet, Esra Erkal-Paler, a spokeswoman, said in an e-mail.
Sanofi, France’s biggest drugmaker, declined to comment on questions from Bloomberg News about whether it’s had any contact with China’s government in relation to bribery probes, or whether the investigation could have any implications for its business in China.
Bayer AG spokesman Guenter Forneck said the company hasn’t been approached in China by the authorities in connection with any misconduct, and declined to comment on the Glaxo situation.
Merck & Co., the second-biggest U.S. drugmaker, hasn’t been contacted by the Ministry of Public Security, spokeswoman Kelley Dougherty said.
The focus on corruption coincides with the government’s objective to improve access to health care, lower drug prices and improve public hospitals, said Huang at the Council on Foreign Relations.
China’s top economic planning agency is investigating the costs and prices of drugmakers including Glaxo, Merck, Novartis and Baxter International Inc. to improve the pricing system for medicines. The National Development and Reform Commission will examine 27 companies for costs and 33 for pricing, according to a July 2 statement.
“No non-Chinese company, in pharmaceuticals or any other field, should be gloating,” said Erik Gordon, a business and law professor at the University of Michigan in Ann Arbor, in an e-mailed statement. “What they should be learning is that they could be next if they fail to keep China happy.”