Telegraph: Sources say 30 GSK employees under house arrest

Reports are starting to put a few details around what is going on with more than two dozen GlaxoSmithKline ($GSK) employees in China who have been arrested and have reportedly confessed to paying bribes to doctors and hospitals to increase sales. And China-watchers say it is no surprise that authorities there are lashing out at foreign companies as a way to draw attention away from their own regulatory shortcomings.

The Telegraph, citing sources, says at least 30 GSK employees are under house arrest and surveillance, including at least one British citizen. China's Public Security Bureau has said they are part of scheme to inflate drug prices. Five or 6 executives were among those picked up by law enforcement. The executives arrested included GSK's legal counsel in China, making it difficult for the others to defend themselves, a source told the newspaper.

A spokesman for GSK today declined to confirm the number of employees or if its top legal adviser in China was among them. It put out a statement yesterday saying it was cooperating with authorities but that its own internal investigation had found no evidence of corruption by its employees. The company is reportedly in meetings to figure out how to proceed and has hired the Jun He law firm from Beijing to represent it.

China has faced criticism internally for lax oversight for a variety of food and drug safety issues in recent years. Last year, for example, it shut down a number of illegal drug capsule plants after media reported they were using toxic waste leather in their gelatin. Seven of those arrested went to prison this year.

"I think the Chinese are being smart, saying 'If you've got a stain on you, then throw mud on someone else,'" Daniel Gouré, vice president of the Lexington Institute, a public policy research organization, told CNBC. He pointed to multiple probes launched in recent weeks against a number of industries, saying it smacks of a concerted effort to make a point about foreign companies.

Chinese regulators last week said they will size up the cost structures and pricing of 60 drugmakers, both domestic and foreign, as it figures out how much they should be paying for drugs. Separately, regulators said it was investigating Nestlé, Abbott Laboratories ($ABT) and Danone for "monopolistic" pricing.

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