GSK used travel agencies for China bribes: police

BEIJING Chinese police on Monday accused British drugmaker GlaxoSmithKline of channeling bribes to Chinese officials and doctors through travel agencies to boost sales illegally and raise the price of its medicines in the country.

The charges make the GSK case the highest profile corporate investigation in China since four executives from mining giant Rio Tinto were jailed in March 2010 for taking bribes and stealing commercial secrets.

Gao Feng, head of the economic crimes investigation unit at China's Ministry of Public Security, said since 2007, GSK had transferred as much as 3 billion yuan ($489 million) to more than 700 travel agencies and consultancies over six years.

Four senior Chinese executives from GSK had been detained, Gao said at a news conference. The Ministry of Public Security had said last week that GSK executives in China had confessed to bribery and tax violations.

GSK said it was deeply concerned by the developments and had stopped using the travel agencies identified by the investigation. It said it was reviewing all third party agencies and all historic transactions related to the travel agencies.

"GSK shares the desire of the Chinese authorities to root out corruption," it said in a brief statement. "These allegations are shameful and we regret this has occurred."

GSK supplies key products such as vaccines in China, as well as drugs for lung disease and cancer.

Sources familiar with the situation said GSK's general manager for China, Mark Reilly, had left the country for London 10 days ago to attend routine meetings and was now working in Britain, where he is in regular contact with the team in China.

The probe into Britain's biggest drugmaker is one of a string of investigations into foreign firms and their pricing practices in the world's second-biggest economy.

The official People's Daily newspaper said GSK collaborated with travel agencies to funnel bribes to doctors and officials by creating fake "conference services" as expenditure for GSK to misappropriate funds, some of which would be spent on bribes.

"We have sufficient reason to suspect that these transfers were conducted illegally," Gao said. "You could say the travel agencies and GSK were criminal partners. Among the partners, GSK was mainly responsible. In a criminal organization there is always a leader."

Gao gave no examples of how the bribery involving the GSK executives worked. He said there were also instances of "sexual bribery", although he did not elaborate.

He said police had uncovered information that pointed to similar money transfers made by other multinational pharmaceutical companies in China.

"Whether they were engaged in illegal behavior, you can go interview them. You just need to ask them one question: Are you sleeping well at night?" Gao said.

He did not name any other foreign companies.

KEY MARKET

China has targeted foreign firms on multiple fronts in the past few months, including over alleged price-fixing, quality controls and consumer rights, forcing companies to defend their reputations in a country where international brands often have a valuable edge over local competitors in terms of public trust.

European food groups Nestle and Danone said they would cut infant milk formula prices in China after Beijing launched an inquiry into the industry.

China is increasingly important for big drug groups, which rely on growth in emerging markets to offset slower sales in Western markets where many former top-selling medicines have lost patent protection.

IMS Health, which tracks pharmaceutical industry trends, expects China to overtake Japan as the world's second-biggest drugs market behind the United States by 2016.

GSK sold 759 million pounds ($1.15 billion) of pharmaceuticals and vaccines in China in 2012, up 17 percent on 2011, representing around 3.5 percent of the group total.

The detained GSK executives include Liang Hong, vice president and operations manager of GSK (China) Investment Co Ltd and Zhang Guowei, the company's vice president and human resources director, the official Xinhua news agency reported.

It was not immediately clear if the executives had legal representation.

Xinhua said it was given access to one detained travel agent who said he did business with Liang. The agent said he sometimes arranged money for bribes and delivered it to the recipient. The agent also paid kickbacks to Liang, Xinhua reported.

Xinhua, given access to Liang by the authorities, quoted the detained executive as saying medicine which cost 30 yuan to make could be sold to patients for 300 yuan. It did not specifically say Liang was referring to GSK drugs.

The police last Thursday said the case against GSK involved many staff, with bribes offered to Chinese government officials, medical associations, hospitals and doctors.

Police said they had taken no action against any British nationals in the GSK case. No information had been received from GSK's UK headquarters, they said.

($1 = 0.6615 British pounds)

(Writing by Kazunori Takada and Paul Carsten; additional reporting by Ben Hirschler and Kate Holton in London. Editing by Dean Yates and Jane Merriman)