Glaxo Scandal: Are You Vulnerable Like GSK's CFO?

You can say that Steve Nechelput is a loyal one-company man. He has spent most of his working life with UK healthcare multinational GlaxoSmithKline (GSK), becoming Finance Director for the Middle East in the mid-1990s, Financial Controller and later Financial Director for Latin America from 1996 to 2001, and then Finance Director, Consumer Healthcare, International, from 2001 to 2006.
 
He then spent six years in Singapore as Vice President Finance for Asia Pacific before moving to Shanghai last year to assume the post of Vice President Finance for China and Hong Kong. It now looks like British-born Nechelput will be staying put for a while.
 
In June, the Chinese authorities told him he could not leave China. The finance chief has not been arrested or detained and “he continues in his role as finance director for GSK China,” a company spokesman stressed. But Nechelput is apparently seen as somehow involved in the alleged bribery of government officials and doctors to increase GSK sales and inflate the prices of its products.
 
After all, US$489 million has supposedly been turned over to 700 travel agencies and consultancies in China in a six-year span to facilitate the payments. How can Nechelput not know what was going on, even though the veteran GSK executive has been in his post only since July last year?
 
Are you vulnerable?
As more details trickle out about the GSK scandal, CFOs and others in finance may well wonder what, if any, it means to them and their organization. If their company is not in China, or if they are not in healthcare, well, what me worry? Especially if their enterprise has implemented technology-enabled systems and processes that are designed to alert finance and other departments about deviations from the rules.
 
But GSK, which recently reported a 2% increase in second-quarter revenues to US$10.2 billion, says it has all these systems and processes in place. The problem, GSK International President Abbas Hussain asserts, is that “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.”
 
It would seem that Nechelput is not one of those executives, since he has not been arrested. But questions about finance’s role are inevitably being raised. If the CFO did not know what has allegedly been going on for years, why not? Were the systems not robust enough? Was finance duped? Was finance aware of the alleged practices, but chose to look the other way because that was how business is done in China?
 
It’s too early to say, but what’s happening in GSK in China – and potentially to other foreign pharmaceutical players such as AstraZeneca, whose Shanghai offices were reportedly also visited by the police – should be a wake-up call to other CFOs across the region.
 
As veteran finance chief Jeremy Gray, Asia CFO of US multinational WR Grace, observes, “more and more countries are introducing legislation to fight corruption – and some are even getting serious about enforcing the law.” In China, he says, “the Communist Party leaders understand that a growing middle class will no longer tolerate corrupt officials.”
 
It would be infantile to believe that the types of bribery and corruption in China are not happening elsewhere in the region. Perhaps not as much in Hong Kong and Singapore, which are generally seen as having strong anti-corruption measures (although the occasional financial scandal still erupts there), but certainly in India, Indonesia, Philippines, Vietnam and other places that score particularly high in Transparency International’s Global Corruption Barometer 2013 report.
 
However, these countries are also showing signs of cracking down, even as the US and the UK are also getting tough on practices overseas by their own companies and foreign enterprises listed in their jurisdictions. The ones caught in the middle are finance and CFOs like Nechelput, who get part of the blame when the wrongdoing is revealed for all to see.
 
Rare police briefing
The case made the headlines in July after a rare briefing by China’s Ministry of Public Security with select media, including a reporter with Britain’s Daily Telegraph who recorded the proceedings (click here to listen to the audio file).
 
Gao Feng, who described himself as the person in charge of the case, said through a translator that “parts” of GSK are “encouraging bribery activities.” You will not find the details within GSK itself, he said, because the company uses more than 700 travel agencies as “platforms for transferring money” to government officials, doctors, hospitals and other “persons involved in the medical industry.”
 
Since 2007, said Gao, GSK has transferred as much as RMB3 billion (US$489 million) to the travel agencies, whose sole customer appears to be only GSK. The objective is to boost GSK sales by persuading doctors to prescribe GSK drugs more frequently and hospitals to place more orders. “From our investigation, we found that bribery is actually part of the strategy of the company,” said Gao.
 
To curry favor with GSK, the travel agencies also bribed GSK staff with, in effect, GSK money, Gao went on, adding the titillating morsel that the transactions involved “sexual” favors. “We also found that GSK not only offers bribes, but is also involved in tax-related crimes,” said Gao, although he did not elaborate. “This is an ongoing investigation; we will make more disclosures at the proper time.”
 
Four senior executives have been detained, all of them Chinese. What about the foreign executives? Said another Ministry of Public Security official, who was not identified clearly in the audio recording: “So far we have not undertaken any enforcement [action] against other nationals. However, as the investigation [continues], I cannot promise you anything. The chief of GSK [Mark Reilly, who has now been replaced] is actually a UK national. After we investigated this company, this person left China and has not returned yet.”
 
Are other pharmaceutical companies doing the same thing? “We are not so sure right now,” said Gao. “You have to ask the companies yourself. Probably one question [to ask is]: ‘Can you sleep well?’” The stance taken by the police and official media is that the Chinese consumer is the real victim of GSK’s illegal activities because the company is passing on the cost of the bribes to the public by raising drug prices. As well, the bribed doctors may be prescribing GSK medicines that the patient may not really need.  
 
“Bribery is a commonly recognized crime internationally,” Gao concluded. “For the Chinese police, we are willing to work closely with our overseas partners to meet the challenge to fight this serious crime” – a declaration that should strike more fear into multinational hearts as the US and the UK conduct their own investigations into GSK’s dealings in China.
 
‘Sexual desires’
Reporting by Xinhua, China’s official news agency, has added more meat to the barebones police account. The agency said it interviewed a 31-year-old regional sales manager at GSK, surnamed Li, who revealed that sales reps are given RMB10,000 to invite doctors to high-end academic conferences. “They also established good personal relations with doctors by catering to their pleasures or offering them money, in order to make them prescribe more drugs,” Xinhua reported.
 
One of Li’s reps, a 35-year-old woman surnamed Wang, told Xinhua she joined the doctors in their office to act as their assistant and “meet their needs as much as possible, even their sexual desires.” According to Xinhua, Ms. Wang claimed that GSK’s China executives knew what was going on. Some of them “gave clear directives to the sales department to offer bribes to doctors with money or opportunities to attend academic conferences.”
 
In its own interviews, The Wall Street Journal spoke to Cui Lihua, described as a physician at Beijing’s Bo’ai Hospital, who was one of 30 or so doctors treated by GSK to a three-day all-expenses paid tour to scenic Guilin in May. Dr. Cui said she learned a lot and was given a “lecture fee” by GSK, though she declined to say how much it was and stopped responding to subsequent requests for comment.
 
Reviewing documents provided by an anonymous Glaxo whistleblower, whose tips were the basis of current US and UK investigations (but not the probe in China, according to Gao, who said the Chinese police did their sleuthing on their own), the Journal said other trips included those to Budapest, Greece and other far-off places.  
 
“The tipster said such company-sponsored trips were part of a broader effort involving perks and cash – including 1,000 yuan, or about $160, honorariums and 2,000-yuan speaking fees – to get doctors to boost drug prescriptions,” the newspaper reported. The whistleblower indicated the so-called lectures and speaking opportunities were fictitious.
 
The fallout
The investigations inside and outside China are continuing. In July, 18 more people were arrested in the central city of Zhengzhou, one of the sales territories handled by the regional sales manager Xinhua had interviewed. According to the website of China’s state radio, those held were “GlaxoSmithKline (China) employees and some medical personnel.”
 
Finance chief Nechelput is still unable to leave China, but he has a new boss in Hervé Gisserot, formerly GSK vice president for Europe, who has reportedly flown to Shanghai as replacement for Reilly. The company said Reilly will remain in London headquarters and help the company deal with the bribery allegations.
 
It may be that the hold order on Nechelput will quietly be dropped and the whole affair will blow over, provided GSK follows through with its promises to cut the price of its drugs (a pledge other foreign pharma players in China are also making) and make sure to comply with the law.
 
A monetary fine may be one likely outcome. In 2012, GSK paid a fine of US$3 billion in the US after admitting in court that it bribed psychiatrists with all-expenses paid trips, cash and other perks to boost sales of the anti-depressants Paxil and Wellbutrin and the asthma drug Advair. It was a staggering amount – but only 11% of the combined US$27.9 billion in estimated sales of those three drugs over the period of the settlement.
 
“We support the efforts of the Chinese government to reform the medical sector, and we are open to looking at all ideas to improve affordability of and access to our medicines, including changes in our business model in China,” said a contrite Andrew Witty, GSK’s global CEO. “We have a long history and a very large footprint in China, and we continue to see the country as a key place for further investment.”
 
It remains to be seen how the scandal will affect the professional and personal reputations of finance professionals like Nechelput. But for others in China and elsewhere in emerging Asia, the lesson is clear. Make sure to know what the sales organization is doing – and decide how to act based on that information.
 
The truth is that companies in Asia, especially those covered by US and UK anti-bribery laws, can no longer count on business going on as usual. That US$3-billion fine GSK paid in the US can be a big boost to many government treasuries. The 10% to 30% monetary reward to whistleblowers on fines collected by the US Securities and Exchange Commission is a huge motive for insiders to report wrongdoing as well.
 
And as Gao said at the media briefing: “Can you sleep well?”
 
About the Author

Cesar Bacani is Editor-in-Chief of CFO Innovation.      

 

Photo credit: Shutterstock

 

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