GlaxoSmithKline’s (GSK) investigation serves as a cautionary tale to American companies, particularly health-focused companies, interested in operating in China. GSK’s pharmaceutical sales plummeted sixty percent in the third quarter due to a Chinese anti-corruption investigation. In July 2013, the Chinese government accused the pharmaceutical giant of funneling approximately $500 million to government officials, medical associations, hospitals, and doctors in order to boost sales of their products. China has arrested several GSK officials and will likely require the company to pay a fine above $2 billion. The investigation is part of China’s efforts to curb business corruption and clean up its health industry, which is undergoing a massive expansion.
Though GSK has admitted compliance problems, it has publicly distanced itself from its Chinese operations by stating that the responsible individuals operated independently and outside of the company’s compliance programs.
While there was initial speculation that such an investigation would prompt GSK to withdraw from the nation, CEO Andrew Witty has denied any such proposition. Though drug sales in China constitute only four percent of GSK’s annual sales, withdrawing would mean wasting GSK’s investments in the country, which have totaled $500 million since the 1980s. GSK is the only multinational pharmaceutical company to have end-to-end business operations in China from drug discovery to marketing. It also has a major R&D lab in Shanghai and has a 7,000-member workforce. Additionally, withdrawing from China would mean missing out on China’s rapidly growing pharmaceutical market. This industry has grown by twenty percent every year for the past five years and is believed to be worth $70 billion.
GSK’s investigation is significant for U.S. companies because by investigating the case and forcing GSK officials to apologize on television, the Chinese government is alerting foreign companies about its priorities: investigating foreign companies for bribery. Companies interested in opening endeavors in China should be aware of these priorities when considering access to government officials.
Additionally, companies found guilty of corruption in China will likely be held accountable by regulators from many nations. In this case, though it is unlikely that GSK will withdraw, it will likely pay fines not only to the Chinese government, but also to the U.S. government under the Foreign Corrupt Practices Act and the UK government under its Bribery Act. GSK falls under both countries’ jurisdiction because it is a British company that trades on the U.S. stock exchange.
Finally, when an investigation opens against one company, other companies in the same industry may also be implicated. For example the GSK investigation has targeted other pharmaceutical companies such as Novartis, Sanofi, and U.S. firms Bayer and Eli Lilly.