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Compliance the buzzword for foreign firms in China after Glaxo

A flag (L) bearing the logo of GlaxoSmithKline (GSK) flutters next to a Chinese national flag (C) and a Union Flag (R), outside a GlaxoSmith
A flag (L) bearing the logo of GlaxoSmithKline (GSK) flutters next to a Chinese national flag (C) and a Union Flag (R), outside a GlaxoSmith

By Michael Martina

BEIJING (Reuters) - A Chinese bribery investigation into British drugmaker GlaxoSmithKline has sent tremors through multinational pharmaceutical firms in China, prompting at least one to review how they do business in the country.

Experts said foreign companies across the spectrum were watching closely to see what happened to GSK and its four detained Chinese executives given bribery and business go hand-in-hand in the world's second biggest economy.

Chinese police on Monday accused GlaxoSmithKline of bribing officials and doctors to boost sales and raise the price of its medicines. They said GSK transferred up to 3 billion yuan ($489 million) to 700 travel agencies and consultancies over six years to facilitate the bribes.

Britain's biggest drug maker said it was deeply concerned by the developments, which it called "shameful".

On the same day police announced their revelations, senior managers from another multinational pharmaceutical firm in China were telling staff to make sure they complied with Chinese regulations governing the industry, one employee said.

"The message from the top is that if I have to choose between compliance and winning business, I would rather lose the business," the employee told Reuters, requesting anonymity because of the sensitivity of the matter.

Bribes to government officials, underfunded hospitals and poorly paid doctors have long facilitated the regulatory approval, distribution and the pricing of medicines in China.

Experts said it was too soon to tell if the GSK investigation would change such practices.

On top of the police probe, China's National Development and Reform Commission is examining prices charged by 60 local and international drugmakers including units of GSK, Merck & Co Inc and Astellas Pharma Inc <4503.T>.

"All the other players in the industry will be taking a look at their procedures, whether they face any active investigations or not," said John McFarland, head of fraud prevention at Hill & Associates, based in Singapore.

CORPORATE BRIBERY RIFE

The GSK investigation is the highest profile corporate probe in China since four executives from mining giant Rio Tinto were jailed in March 2010 for taking bribes and stealing commercial secrets. Three of those executives were Chinese while the fourth was a Chinese-born Australian.

Past improper payouts in China have also landed other Western drugmakers in trouble - although with U.S. rather than Chinese authorities.

Pfizer Inc and Eli Lilly & Co have both settled with Washington in the past 11 months over alleged corrupt payments in foreign markets, including China, and more cases under the U.S. Foreign Corrupt Practices Act are pending.

China is increasingly important for big drug makers, which rely on growth in emerging markets to offset slower sales in Western markets. IMS Health, which tracks pharmaceutical industry trends, expects China to overtake Japan as the world's second-biggest drugs market behind the United States by 2016.

Some lawyers in China said corporate bribery was so widespread that a single action in one industry was unlikely to halt the practice without sustained enforcement from the authorities.

But Richard Cassin, an expert on the U.S. Foreign Corrupt Practices Act and author of a popular FCPA blog, said China had drawn a line in the sand for foreign companies.

"The China investigation and detentions of executives of a giant Western company will shake up anyone responsible for compliance," he said.

A legal and compliance executive at a major multinational conglomerate in China said all eyes were on GSK.

"Businesses outside of the sector are really watching this to see whether this is an isolated circumstance," the executive, who was not authorized to speak to the media, told Reuters.

When announcing the accusations against GSK, Chinese police said they had uncovered information that pointed to similar violations made by other multinational pharmaceutical firms, although they have not named any companies.

BIG PHARMA AN EASY TARGET

Pharmaceutical companies are at the mercy of Chinese regulators in getting products licensed for import or manufacture in China, or to get them listed on the national drug registry. They typically rely on hired distributors to get their drugs to market and into hospitals.

State broadcaster CCTV on Tuesday night aired an interview with one of the detained GSK executives, who said he funneled money through travel agencies by arranging conferences, some of which were never held.

That money was then used to bribe officials, doctors and medical associations to facilitate sales or drug registrations.

According to sources with knowledge of the industry, China's sophisticated and thriving market for fake documents also allows local employees to provide forged paperwork to more senior or global managers.

Efforts made by drug firms at compliance training can even backfire, as some employees learn how to avoid detection.

Politics could also be playing its part in the focus on foreign drugs companies.

China's government is faced with a $1 trillion healthcare bill by 2020, according to a report by consultants McKinsey, and is keen to cut the prices of medicines while at the same time trying to provide universal access to healthcare.

That has made pharmaceutical companies vulnerable, said James Zimmerman, managing partner of law firm Sheppard Mullin Richter & Hampton and a former chairman of the American Chamber of Commerce in China.

"My take is that the PRC government is targeting the industry given that cost-effective health care for the masses is a critical current policy objective for China's aging population, and the government's legitimacy is at risk if it fails to deliver on its promise of affordable and accessible health care," Zimmerman said.

(Additional reporting by Rachel Armstrong in SINGAPORE and Matt Haldane in WASHINGTON; Editing by Dean Yates and Alex Richardson)

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