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GlaxoSmithKline plc’s Chinese Problem Is Getting Worse

When GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) was found guilty of using bribes to sell its drugs in China, the company quickly tried to draw a line under the incident and move on. 

However, Glaxo’s Chinese problem is not going away any time soon and the situation continues to deteriorate for the company. Indeed, Chinese policymakers have stated that Glaxo’s actions have done irreparable damage to the company both in China and elsewhere.

What’s more, Glaxo’s senior employees have been accused of orchestrating a “massive and systemic bribery” by Chinese authorities and the company is facing an investigation by the Serious Fraud Office (SFO) here at home.

Not limited to China
GlaxoSmithKline

China is not a huge market for Glaxo. Only around 5% of Glaxo’s overall revenue comes from the Chinese market, so the company can afford to lose some customers, But this is not the real problem.

Glaxo’s actions, and subsequent investigation by the SFO, now mean that the company could be liable in the UK under the Bribery Act. In effect, this means that the whole company would become responsible for its actions within China, and the group could face prosecution within the UK and even the US, which could result in catastrophic repercussions.

What’s more, claims that Glaxo’s staff bribed officials in order to sell its treatments are not just limited to China. It has been claimed that Glaxo also bribed officials in other markets, including Iraq and Jordan.  

Employees are unhappy

The threat of legal action from the UK and US governments is not Glaxo’s only worry. Surprisingly, during the past few weeks it has emerged that Glaxo has turned its back on Chinese employees, who were reportedly instructed to issue bribes out of their own pocket. 

According to staff members in China, Glaxo’s regional management authorized employees to give out bribes by faking expense claims. However, in an attempt to clamp down on illegal practices, Glaxo has now stepped up scrutiny of staff expense claims in China.

Staff have been instructed to produce bank records to prove that they paid amounts directly to merchants. Those who are unable to do so have been denied both reimbursement and their year-end bonuses. 

Effectively this means that sales staff have been forced to fund the company’s bribes out of their own pockets, despite the fact that regional management authorized them to make the payments. 

So, as well as angering Chinese policymakers, Glaxo is now turning its back on Chinese employees. This whole debacle has become a PR nightmare for the company.

Foolish summary

Overall, it could be some time before Glaxo’s Chinese mess is sorted out. As a result, it’s likely that Glaxo’s sales will come under pressure. and it’s not clear how much the incident will eventually cost the company.

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Rupert does not own any share mentioned within this article. The Motley Fool has recommended shares in GlaxoSmithKline.