Would GSK pull out of China altogether?

GSK CEO Andrew Witty

GlaxoSmithKline ($GSK) is in the middle of a firestorm in China, accused of bribery and potentially facing massive fines from the government. The very public scandal has left a chill on business for it and other drugmakers in this key market. But even with all of that, would the British drugmaker actually pull out of the most populous country in the world, on which it has bet heavily?

According to BBC business editor Robert Peston, the drugmaker is evaluating whether to do just that. Peston claims he has been told that first off, business has been so undermined by the accusations that the company is now figuring out if the cost of manufacturing and supplying drugs there will outstrip the possible returns. More importantly, he says China may want it to take corporate responsibility for allegedly funneling bribes and favors to doctors and officials using a $489 million travel fund. Thus far, CEO Andrew Witty has blamed the problems on rogue individuals, but reports in China's media this week had former employees claiming top execs were involved. A confession of that nature would be expected to trigger foreign corruption charges from the U.S. and the U.K., adding another level of penalties to the case.

This week, Daniel Roule of Squire Sanders, a U.S. law firm that handles many pharma cases, told the South China Morning Post he expects GSK to be investigated by the U.S. for the alleged crimes. "If it's found by U.S. and U.K. investigators that GSK had compliance programs but didn't implement them effectively, then GSK will have a problem," Roule said.

It is the specter of this kind of backlash that has GSK most worried, according to Peston. "So the cost for GSK of refusing to plead guilty, as a company, may be a withdrawal from what many would see as the most important market in the world," Peston reports.

Glaxo certainly has experience with the toll the U.S. legal machinery can extract. Just over a year ago, GlaxoSmithKline agreed to pay $3 billion in fines and penalties to wrap up extensive U.S probes into alleged kickbacks and aggressive drug marketing as well as claims it downplayed the risks of its controversial diabetes drug Avandia. It also pleaded guilty to some charges. In that case, Witty was able to say it all happened before he arrived. This time around would be different. 

In its July financial report, GSK actually reported that sales in China were up 14% for the quarter but warned that was not expected to continue given the unfolding investigation there. Last week, Marc de Garidel, CEO of French drugmaker Ipsen, said the bribery investigations have been a huge blow to everyone's business, whether they are directly involved or not. He said Chinese doctors are so frightened by the mess that they will not even talk with sales reps.

A GSK spokesperson told FiercePharma in an email today that the company would not comment on individual news stories, "but we've been clear that GSK is committed to China for the long-term." In a section of its own website dedicated to the investigation, GSK says: "We have invested heavily in China, spending more than $500 million to date, creating more than 7,000 jobs and running a number of factories. We also have a major research and development center in China, which is the global center for our research into neurodegenerative diseases such as Alzheimer's disease. GSK remains committed to China for the long term to serve customers, partners and patients."

- read the BBC piece
- here's the GSK statement

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