The London-based multinational drugmaker, also known as GSK, supplies key products such as vaccines in China, as well as drugs for lung disease and cancer. In 2013, the company was targeted by Chinese authorities over alleged corruption, price-fixing and quality controls.
No magic pill to beat graft
There is a global context to Beijing's case against GSK, but underfunded hospitals with underpaid doctors provide fertile ground for corruption
The central government's investigation of British drug giant GlaxoSmithKline has exposed systemic corruption in the mainland pharmaceutical industry, but analysts say the arrests of the GSK executives will have limited impact without measures to remove incentives for graft.
GSK's problems on the mainland are part of the global corruption in the drug industry, which also engulfs developed markets such as the United States, the analysts say.
Mainland police allege that GSK, listed in London and New York, used travel agencies to funnel nearly three billion yuan (HK$3.8 billion) in kickbacks to doctors, hospitals and others who prescribed their drugs. At least four executives from GSK's mainland operation have been detained.
"We do not think this is a widespread anti-foreign company campaign," said John McFarland, head of fraud prevention at Hill & Associates, a Hong Kong risk consultancy. "There has been some comparison to Rio Tinto but that case was different from GSK, as there is no suggestion of state secrets yet."
In 2010, Stern Hu, an Australian employee of Anglo-Australian mining giant Rio Tinto, and three Chinese employees of Rio Tinto were jailed on the mainland for stealing commercial secrets and taking bribes. They were originally charged with stealing state secrets, but those charges were dropped.
Rob Morris, managing director of advisory firm AlixPartners, said the pharmaceutical industry on the mainland had "high exposure to corruption risk" because decisions on which drugs to use were often taken by a single doctor, making that doctor the target of bribery. "There are many ways to provide a doctor something of value," he said. "Apart from a straightforward bribe, it could be an unwarranted discount or excessive free samples or attendance at a symposium."
In a country as big as China, pharmaceutical companies relied on third-party distributors, Morris said, reducing their control over their distribution chain.
Robin Kerawala, a co-founding partner of Shanghai-based consultancy SmithStreetSolutions, said features of the mainland's health care system - including the nature of hospital funding and the low salaries of doctors in public hospitals - encouraged unlawful practices in the pharmaceutical industry.
"These factors have caused hospitals and doctors to seek incentives, and the practice has become customary among local drug companies," Kerawala said.
A surgeon at a hospital in Shanghai who earns less than 20,000 yuan a month admitted that half his actual income came from kickbacks for prescribing drugs, saying: "without this grey income, how can I raise a family?"
A drug salesman for a US pharmaceutical manufacturer in Shanghai said he had to offer bribes because the practice was so widespread on the mainland. To get a drug listed in the "essential drug category" on the mainland, pharmaceutical companies needed to bribe officials at development and reform commissions, health departments, social insurance departments and drug supervision officials.
"Almost all patients are covered by insurance on the mainland and doctors at public hospitals are required to prescribe drugs from this essential drug category," the salesman said.
The authorities say the corruption of some GSK executives led to drug prices on the mainland being inflated by as much as 30 per cent.
"Potentially, corruption in the drug industry can increase social instability in China," Morris said. "It is a major social concern." Corruption diverted drug profits into the wrong hands, raising prices, he said.
"China has a problem with the increasing cost of providing health care to an ageing population," Morris said. "Corruption will only exacerbate this issue."
GSK has fallen foul of the government not only on the mainland, but in Britain and the US.
In April, Britain's Office of Fair Trading began investigating GSK over allegations that it paid other drug companies to slow down production of cheaper versions of its antidepressant Seroxat. In July last year, the US Department of Justice announced GSK had agreed to plead guilty and pay US$3 billion to resolve its liability from the unlawful promotion of certain drugs, its failure to report safety data and alleged false price reporting. It was the largest health care fraud settlement in US history.
GSK paid kickbacks to US doctors to induce them to prescribe certain drugs, which caused false claims to be submitted to US government health care programmes, the US Department of Justice alleged.
Morris said that because mainland doctors were paid less than those in developed economies, the risk of corruption in the drug industry was greater on the mainland than in the US.
In 2009, the World Health Organisation said 10 to 25 per cent of the US$750 billion spent on drugs globally every year was lost to corruption. In developed countries, health care fraud cost individual governments as much as US$23 billion a year, it estimated. Countries with a greater incidence of pharmaceutical corruption had higher child mortality rates, the WHO said, while a lack of medicines coupled with counterfeit and substandard medicines led to patient suffering. "Medicines change hands several times before reaching patients," it said. "The large number of steps in the medicines chain allows numerous opportunities for unethical practices."
Many of those unethical practices went unreported, the WHO said, due to "fear of retaliation towards whistle-blowers and a lack of incentives to come forward".
Zhang Lufa, an academic at Shanghai Jiao Tong University, said the GSK probe would not reduce corruption in the drug industry. "The situation won't change unless the incomes of doctors and funding for hospitals are improved," Zhang said.