Chinese scandal may taint GSK results

GlaxoSmithKline chief executive Sir Andrew Witty will hope his investors are concentrating on the numbers when he unveils the FTSE 100 giant's second-quarter financial results at midday today.

And the numbers will be good. Analysts expect GSK, Britain's biggest drug-maker, to announce revenue growth of 2 per cent and a dividend hike of 12 per cent.

But shareholders will be nervously eyeing two different numbers: 372 million – the euro value of an alleged Chinese bribery scandal in which GSK has already admitted some culpability. And 1.19, the percentage by which GSK’s shares closed down on Monday when the company was the FTSE’s worst performer.

Sir Andrew is expected to repeat Monday's apology when he presents GSK's financial data. The strong wording of that first statement shows just how much trouble the company could be in. Abbas Hussain, GSK's international president for Europe and emerging markets, made little attempt to wriggle when he told China: "GSK is taking this situation extremely seriously.

“Certain senior executives of GSK China who know our systems well, appear to have acted outside of our processes and controls which breaches Chinese law. We have zero tolerance for any behaviour of this nature. I want to make it very clear that we share the desire of the Chinese authorities to root out corruption wherever it exists.”

The Chinese authorities believe they have uncovered “mafia-like” behaviour by GSK employees, who they suspect of creating a complicated network of 700 travel operators as a facade for bribing doctors in attempt to buy market share.

The travel operators, who organise conferences for doctors, were allegedly paid bribes to “stimulate contracts”; in effect they supposedly took GSK cash and paid it out as backhanders to doctors. Invoices were then falsified for larger conferences than actually took place, giving GSK cover for its illegal activity and – as a cherry on top for Chinese investigators – creating tax-avoidance issues.

A number of other pharmaceutical giants have been drawn into the probe with Belgian's UCB and America's Baxter International also being questioned. AstraZeneca has had three employees taken in for questioning, although Britain's second-biggest drug-maker maintains the allegations are not connected to the travel agency ring.

Travel agents halted
When GSK was first informed of the investigation, it immediately halted the use of travel agencies and launched an investigation into all its Chinese third-party relationships. But that didn't stop Chinese authorities arresting four senior GSK staff as well as Peter Humphrey, a British private investigator whose advisory firm ChinaWhys has worked with GSK.

GSK has moved swiftly to turn the tide, sending in Mr Abbas Hussain – brother of England cricket captain Nasser Hussain – as a 12th man. He has pledged to reduce drug prices in China and apologised to Chinese police officers.

Unfortunately for GSK, the allegations do not stop at bribing doctors. US media reports allege GSK has problems at its Chinese drug development arm. Confidential documents obtained by the New York Times reportedly show internal GSK auditors warned executives two years ago the Chinese R&D centre could expose its parent to regulatory action and risk.

In 1840, the British army invaded in support of private traders, forcing the country to open its doors to billions of pounds worth of drug imports.

The drug in question was an addictive mixture of tobacco and opium and every Chinese child learns about their country’s humiliation in the ensuing Opium Wars. Nearly two centuries later, will a British private company be able to apologise enough?

Helen Power is a freelance journalist