Chinese police say GlaxoSmithKline plc (NYSE:GSK) (LON:GSK) used travel agencies as the channel for bribing officials and doctors in the nation to boost its sales and raise prices. That’s according a report by Michael Martina of Reuters.
Last week GlaxoSmithKline plc (NYSE:GSK) (LON:GSK) was accused by Chinese officials of using unfair sales tactics to boost sales of its Botox in the country. A few days later, executives of the drug maker confessed to bribery charges and violations of tax laws.
Chinese police release details about the GlaxoSmithKline probe
GlaxoSmithKline plc (NYSE:GSK) (LON:GSK) is accused of transferring up to 3 billion yuan ($489 million) to more than 700 different travel agencies and consulting firms. Ministry of Public Security Chief Gao Feng said four senior Chinese executives at the drug maker are in custody.
The company said it was concerned about the investigation and was no longer using the agencies investigators identified. It also said it was examining all outside agencies and transactions made in connection with those agencies.
China cracks down on foreign firms
According to Reuters, the charges against GlaxoSmithKline plc (NYSE:GSK) (LON:GSK) are one of the highest profile corporate investigations carried out by Chinese authorities in more than three years. The investigation is one of several made into the pricing practices used by foreign companies.
Chinese officials said at a press conference today that it looked like GlaxoSmithKline was mostly responsible for the illegal transfers but that they were “criminal partners.” They did not explain how the alleged bribes worked, although there was mention of “sexual bribery” apart from the monetary bribes.
They also said Chinese police had found information indicating that other major drug makers may have been making similar money transfers. Officials did not name any other companies at this time.
Detained GlaxoSmithKline executives identified
The executives who have been detained by officials on bribery charges include Vice President and Human Resources Director Zhang Guowei and Vice President and Operations Manager Liang Hong, according to the Xinhua news agency. The agency also said it some with one travel agent who had also been detained in connection with the case. The travel agent reportedly told Xinhua that he arranged the funds for bribes and then delivered them to the recipient. Liang allegedly received kickbacks on the transactions.
Analysts react to the allegations
Societe Generale analyst Bob Buhr issued a report in light of the recent investigation into GlaxoSmithKline plc (NYSE:GSK) (LON:GSK)’s Chinese operations. He notes that after this week’s report, the bribery allegations in China are “becoming more worrisome.” He says that up to 30 employees of the drug maker may be under house arrest and that Chinese police have raided several of the drug maker’s offices in China.
He also points out that the company’s “track record relating to criminal allegations, most recently in the U.S., does not provide much comfort here.” China represents just 3.5 percent of GlaxoSmithKline plc (NYSE:GSK) (LON:GSK)’s total pharmaceutical and vaccine revenue, and he says that these new allegations could greatly damage the company’s reputation. Management had highlighted the company’s “improved corporate culture” since the case in which the company settled with the Justice Department in the U.S. in 2012, so these new charges could damage management’s credibility.
The analyst believes it’s still too early to tell what kind of impact this charges will have on the company. He remains a buyer of the company’s CDS and a seller of its eurobonds.