GlaxoSmithKline's £297-million fine raises the risk for executives in China. The group has been found guilty of bribing non-government officials. That sets a floor for penalties in future probes. But punishments for five executives also send a warning.
The fine Glaxo will have to pay is large in China terms, but relatively small beer for the UK pharma group. After reports of "astronomical" fines for running a "massive" bribery network, the drugmaker has paid out less than half of its 2012 sales in China, and a fifth of a $3-billion fine for similar offences in the United States.
There will be further costs. Glaxo will take a charge for restructuring its Chinese business. The company will also have to widen access to drugs for poorer Chinese in rural areas and be more "flexible" on prices. It's not clear yet whether acting as an organ of state healthcare policy will be as profitable as GSK's previous business model in China.
Still, the modest fine seems a relatively benign outcome. The fact Glaxo has been found guilty of bribing non-government officials may also help in the US, where the foreign Corrupt Practices Act pays particular attention to bribery of public officials. The settlement also frees Chief Executive Andrew Witty to deal with other battles: Glaxo's business has been hit by expiring patents and brutal pricing trends in the US. It now trades at 15 times forward earnings, according to Thomson Reuters Eikon. Sector peers trade at 17 times.
While the Chinese experience has been painful for Glaxo, it has been doubly so for the executives. Five of them, including GSK's former China head Mark Reilly have received sentences for up to four years in jail. While the sentences are suspended, they could make working for a large multinational with Chinese aspirations more difficult. Compare that with western banking, where much larger penalties have been handed out to shareholders while leaving executives without criminal indictments. Ambitious executives looking to grab a piece of China's growth story should note that when things go bad, pain can fall on individuals just as much as companies.
