ANTI-TRUST/NSA SMITHFIELD SECURITY THREAT ~~~ GLAXO NAMES CHINESE COMMUNIST DRUG UNIT HEAD AS ALLEGATIONS DETAILED

ANTI-TRUST/NSA SMITHFIELD SECURITY THREAT ~~~ GLAXO NAMES CHINESE COMMUNIST DRUG UNIT HEAD AS ALLEGATIONS DETAILED

By Makiko Kitamura July 26, 2013 7:53 AM EDT

GlaxoSmithKline Plc (GSK) appointed a new head at its China unit as Chinese state media published details of allegations the company used cash and sexual favors to bribe doctors and health officials in the country.

Herve Gisserot replaces Mark Reilly, who left China after four executives were detained in the nation last month. Gisserot was the senior vice president of Glaxo’s European business. Reilly will become part of the drugmaker’s senior executive team in London, said Simon Steel, a company spokesman.

The crackdown on medical corruption has extended to other foreign drugmakers and local hospitals since China announced the Glaxo allegations in June. The claims prompted Chief Executive Officer Andrew Witty to dispatch Glaxo’s head of emerging markets to China to meet government officials and oversee the reponse to the probe in the country, where it earned 1 billion pounds ($1.5 billion) in sales last year.

“It appears that this is a consequence of some individuals working outside of the controls and processes of the company to defraud the company as well as to then go on and do things which are potentially illegal,” Witty said on a July 24 call to discuss quarterly earnings. “We’re also seeing an inflection point in the Chinese environment in terms of how the government wants to see their entire health-care sector modernize.”

Sales Contribution Glaxo’s sales contribution from China, where revenue gained 20 percent last year, is “likely to be impacted by the current inquiries” in the second half of 2013, Chief Financial Officer Simon Dingemans said on the call. “It’s too early to quantify this,” he said.

Witty commissioned law firm Ropes & Gray to conduct an independent review on the China investigation.

The allegations against London-based Glaxo involve 3 billion yuan ($489 million) in spurious travel and meeting expenses as well as trade in sexual favors, the Public Security Ministry said July 15.

Some Glaxo salespeople in China established “good personal relations with doctors by catering to their pleasures or offering them money, in order to make them prescribe more drugs,” the official Xinhua news agency reported today, citing interviews with police handling the case.

‘Sexual Desires’ The report detailed alleged sales practices of a 31-year-old regional sales manager in central China, and a 35-year-old female medical representative who would meet doctors’ needs “as much as possible, even their sexual desires.” Glaxo targeted raising drug sales by 30 percent a year in the last two years, Xinhua reported, citing the two salespeople.

The police also said 7 percent to 10 percent of the sales volume went to doctors’ personal accounts, according to the report. Some doctors received payment for lectures they never gave, Xinhua reported, and pharmaceutical representatives reimbursed “a large amount of money” in the name of lecture fees, covering expenses such as travel and other entertainment.

Executives at Glaxo in China were aware of the practices, and some “gave clear directives to the sales department to offer bribes,” Xinhua said.

“As we have previously said, we are deeply concerned by allegations of fraudulent behavior and ethical misconduct by individuals in our China business,” Glaxo said in a statement today. “This behavior is a clear breach of GSK’s systems, governance, values and standards. We will continue to cooperate fully with the Chinese authorities in their investigation and take any and every action that is required.”

Restriction Lifted Reilly, who moved to China in 2009, left the country for the U.K. on June 27 after four of his colleagues, all Chinese nationals, were detained. His return was for a routine, planned business trip, the company said at the time.

He will help Glaxo respond to the investigation and support Gisserot during a transition period, the company said. Gisserot has served as president of Leem, a French trade group representing pharmaceutical companies, since January.

A travel restriction on Steve Nechelput, Glaxo’s finance chief in China, has been lifted, and he will remain in his current role, the company said.

“There is still a lot we need to find out,” Witty said on the July 24 conference call. “We will learn from this and we will make changes.”

The company supports the efforts of the Chinese government to reform the medical industry and is open to looking at ideas to improve affordability and access to Glaxo’s drugs, including changing its business model in the country, Witty said.

Separately, Yu Yingzeng was identified by Reuters yesterday as being a U.S. citizen detained in China’s crackdown on medical corruption. Yu is the wife of Peter Humphrey, the British national also detained by Chinese authorities, Reuters said, citing two people with direct knowledge of the matter.

The couple co-founded ChinaWhys, a Shanghai-based risk consultancy that provided services for Glaxo in the past, the report said. It’s unclear if their detention is directly related to the investigation into Glaxo, Reuters said.

To contact the reporter on this story: Makiko Kitamura in London at mkitamura1@bloomberg.net

To contact the editors responsible for this story: Jason Gale at j.gale@bloomberg.net; Phil Serafino at pserafino@bloomberg.net