"Ethics matter" in China--and it's time for multinationals to take note, according to the country's state news agency. With a reputation-tarnishing bribery scandal, dented China sales and a former top exec facing up to a lifetime in prison, GlaxoSmithKline's ($GSK) tale should serve as a prime example of what can happen if they don't.
In an editorial published two days after Chinese police turned over Glaxo's case to prosecutors, Xinhua said foreign investors "should learn to respect the Chinese market," at the very least by pricing products reasonably and doing away with cost discrimination, Bloomberg reports.
"GSK's practices eroded its corporate integrity and could cause irreparable damage to the company in China and elsewhere. The case is a warning to other multinationals in China that ethics matter," the editorial said (as quoted by Reuters).
Using GSK hepatitis B drug heptodin as an example, Xinhua--its editorials are often understood to reflect the government's views--accused Glaxo of manipulating prices to disguise the true costs of drugs, Bloomberg says. It pointed to a Chinese sticker on the med of 73 yuan compared with an actual cost of 15.7 yuan--and a 30-yuan pricetag in the U.S. In some cases, Chinese prices soared 7 times as high as those in other countries, with Glaxo pocketing the money to fund bribes, a Ministry of Public Security official said at a briefing earlier this week.
So far, only three former execs--including former China head Mark Reilly, who could be in line for some serious prison time--have been charged in the scandal, which began last summer when a whistleblower accused the company of using travel agencies to funnel $489 million in bribes to healthcare professionals. But as China goes about making an example of the British drugmaker, it could also leverage bribery charges on the company itself--a move that could result in the "astronomical" fines the country once warned of and the cancellation of its business licenses, Reuters notes.
Those could put a huge hurt on an already-struggling operation. After the probe sunk China pharmaceutical and vaccines sales by 18% for the pharma giant in 2013, GSK posted a 20% drop in those sales in the first quarter of this year. And as the company looks to turn its top line around, it will do so with lowered prices on its meds. After last summer admitting Glaxo execs probably breached Chinese law, emerging markets chief Abbas Hussein promised price cuts in China as penance.
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Special Report: Top 10 drugmakers in emerging markets - GSK | Top 10 pharma companies by 2013 revenue - GlaxoSmithKline