Glaxo Executive Says Changes in China to Cut Drug Prices

GlaxoSmithKline Plc’s head of emerging markets said after meeting with government officials in Beijing some employees may have broken China’s laws and pledged corporate changes that will deliver cheaper medicines.

Abbas Hussain, who was sent to China to help with the probe, said he had a “very constructive meeting” with officials from the Ministry of Public Security. Glaxo faces allegations of economic crimes involving 3 billion yuan ($489 million) of spurious travel and meeting expenses as well as trade in sexual favors, the ministry said last week.

“Certain senior executives of GSK China who know our systems well, appear to have acted outside of our processes and controls which breaches Chinese law,” Hussain said in an e-mailed statement. “We have zero tolerance for any behavior of this nature.”

Separately, Peter Humphrey, founder of a Shanghai-based company that worked with the U.K.’s largest drugmaker to organize an anti-corruption seminar, has been detained in Beijing since July 10, a spokeswoman for the Foreign Office in London said by phone. The spokeswoman, who asked to remain unidentified citing the department’s policy, didn’t specify whether the detention was linked to the probe into Glaxo.

‘Local Matter’

The probe may be widening, given that at least six other global drugmakers, including Merck & Co., Novartis AG, Roche Holding AG and Sanofi, used the same travel agency to make arrangements for events and conferences in the last three years, the New York Times reported, citing documents it obtained.

Sanofi and Roche today confirmed they had worked with the travel agency, called Shanghai Linjiang. Both said they had stopped once the allegations of wrongdoing surfaced. AstraZeneca Plc also today said police had visited its offices in Shanghai, though it believes that was related to “a local police matter focused on a sales representative.”

China detained four senior Glaxo executives on suspicion of economic crimes, the ministry said July 15. Its finance chief in China, Steve Nechelput, has been unable to leave the country since the end of June because of the investigation, though he hasn’t been arrested or questioned, Simon Steel, a Glaxo spokesman in London, said July 18.

Glaxo’s executives “violated China’s laws and damaged markets by engaging in bribery to raise drug prices, expand sales and reap inappropriate profits,” the Public Security Ministry said in a statement posted on its website today. Hussain apologized on behalf of London-based Glaxo and pledged to cooperate with the investigation, the ministry said, citing a recent meeting with the executive and his colleagues.

Travel Centers

Glaxo is reviewing how it operates in China, according to Hussain. “Savings made as a result of proposed changes to our operational model will be passed on in the form of price reductions, ensuring our medicines are more affordable to Chinese patients,” he said.

The company, which made about 1 billion pounds ($1.5 billion) of revenue in China last year, had said in June that it found “no evidence of corruption or bribery” there after a four-month internal investigation.

Glaxo fell as much as 1.2 percent to 1,694 pence in London trading. The stock has gained 27 percent so far this year.

State-owned China Central Television aired a prime-time segment on July 16 detailing how Glaxo executives used travel centers including Shanghai Linjiang International Travel Agency to funnel bribes to government officials, hospitals and doctors.

Liang Hong, an operations manager for Glaxo China and one of the executives detained, said consumers were paying 20 to 30 percent more for drugs because of the bribery, the official Xinhua News Agency reported on July 15.

Humphrey, the British national detained in Shanghai, is the founder of risk management advisory ChinaWhys, according to the consultancy’s website. ChinaWhys teamed up with Glaxo in 2004 to produce a seminar for the European Chamber of Commerce in Shanghai on fraud, corruption and intellectual property issues, according to the website.

The Foreign Office is providing consular assistance to Humphrey’s family, the spokeswoman said. Calls to a mobile number for the Shanghai police press office weren’t answered.

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