I am required to write a research paper about international law case. This paper is a group project and have five parts. I am responsible for writing 4 pages of 2 parts. The two parts are the overview of GSK company and Alternative solution 2. I upload 2 files: outline of the paper and the background of the international law case. I have highlighted what parts should do in outline file.
outline_.docx
gsk_in_china.pdf
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Group Members: Jiahong Wang, Jingxuan Feng,
Yichi Zuo
International Law Case Write Up—GSK in China
Overview of the GSK Company
➢ History
➢ Mission and vision
➢ Current International strategies
➢ The performance of the company: previous vs. current (after the scandal)
Identify the problems that GSK confronted with in the case
➢ Bribery crimes in China and other countries
➢ Sexual Scandal of the company’s executive in China
➢ Improper marketing and pricing strategies
➢ Laws (in China, British, America)
Best practices
➢ Best solution
Actions within corporate headquarters and its foreign subsidiaries
The corporate should increase the level of controls for its foreign subsidiaries,
for example, regularly monitoring the subsidiaries’ performance, meeting with
international managers.
Foreign subsidiaries should strictly screen the job applications in the early
talent selecting process.
Both corporate headquarters and its foreign subsidiaries should develop an
ethical climate, constantly training employees in terms of ethical behaviors,
being strictly compliance with laws and regulations.
The purpose of actions: to fundamentally eliminate the bribery crimes and
bribery incentives, to improve its reputations, market shares, and further
development
Benefits: how the solution is consistent with the company’s goals, missions,
global strategies.
➢ Alternative solutions
Alternative Solution 1:
Alter the personal sales target of the medical sales person. Change the
previous sales model. Medical representatives’ salaries will relate to their service
performance, quality and whether they are useful to doctors, rather than the
quantity of their sales. Also, employees’ welfare will relative to their actual service
performance, rather than doctors’ prescribing drugs. (considering related law issues
examples, statistics)
Advantages:
Avoid medical representatives bribing to doctors in order to achieve a certain sales
volume; cut the costs; improve representatives’ service performance; enhance the
company’s reputations; establish a good and substantial relationship with doctors
Disadvantages:
Employees have less sources to get benefits; they may have less motivation to
work hard; the number of sales staff in GSK’s frontline has been reduced.
Alternative solution 2:
Some complementary solutions: The company can participate in philanthropy
frequently to reshape a good image; Managers can use mobile devices to
communicate with subordinates, giving instantly feedback (considering related law
issues, examples, statistics)
Advantages:
It restores the reputation of Chinese doctors, and improve consumers’ attitudes
toward the company. Divert consumers’ attention from bribery scandals. It is more
convenient to monitor employees’ behavior.
Disadvantages:
Overbudget because of charity activities and purchase of mobile devices.
There are too many records to monitor which may increase managers’ load.
For the exclusive use of D. Jacobson, 2016.
9 -5 1 4 -0 4 9
REV: SEPTEMBER 8, 2015
JOHN A. QUELCH
MARGARET L. RODRIGUE Z
GlaxoSmithKline in China (A)
On June 27, 2013, the Chinese headquarters of GlaxoSmithKline (GSK) in Shanghai was raided by
Chinese investigators. Regional police later announced that four GSK employees were under
investigation for bribing physicians, hospital administrators, and government officials in order to
increase sales of GSK pharmaceuticals. China’s Ministry of Public Security claimed that GSK had
paid over $450 million in bribes to Chinese healthcare practitioners via a network of 700 travel
agencies and middlemen since 2007. At the time of the event, GSK’s wholly owned subsidiary in
China accounted for about 3% of the company’s global sales of nearly $43 billion and employed 7,000
people. GSK’s leadership faced a difficult choice on how to handle the allegations levied by
government agencies in one of its most important markets.
History of GSK
In 1873, Joseph Nathan founded an import-export business in New Zealand that would later
evolve into pharmaceutical giant, GSK. Nathan moved into the healthcare industry in 1904, when he
obtained the rights to the process for drying milk and began to produce baby food. 1 He called the
baby food product “Glaxo” and sold it in New Zealand. He and his sons expanded the sale of Glaxo
to the United Kingdom a year later, and to India and South America after World War I. In 1924, the
company entered into pharmaceuticals with the first commercial vitamin concentrate in the United
Kingdom, a liquid Vitamin D product called Ostelin. 2 The company continued its global growth in
the 1930s, when it built a factory in Italy and established distribution networks in China, Malaysia,
and Greece.3 In 1935, the pharmaceutical department became a subsidiary, Glaxo Laboratories
Limited.4 During World War II, Glaxo expanded its pharmaceutical production to include penicillin
and anesthetics.
In 1947, Glaxo’s parent company dissolved and Glaxo became a public company. 5 In the 1950s,
Glaxo grew through the acquisition of chemical and medical supply subsidiaries. Glaxo established
operations in the United States in 1978 via the acquisition of Meyer Laboratories. 6 In the early 1990s,
Glaxo opened a factory in China. Glaxo merged with rival U.K. pharmaceutical firm, SmithKline
Beecham, in 2000 to become GlaxoSmithKline, then the world’s largest drug manufacturer, which led
shares in the four out of five therapeutic markets (central nervous systems, respiratory, gastrointestinal/metabolic, and anti-infectives). At the time of its creation, GSK had global sales of $22.5
billion and employed over 100,000 people around the globe. 7
________________________________________________________________________________________________________________
Professor John A. Quelch and Research Associate Margaret L. Rodriguez prepared this case. Professor Quelch is the Charles Edward Wilson
Professor of Business Administration at the Harvard Business School and Professor in Health Policy and Management at the Harvard T.H. Chan
School of Public Health. This case was developed from published sources. Funding for the development of this case was provided by Harvard
Business School, and not by the company. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as
endorsements, sources of primary data, or illustrations of effective or ineffective management.
Copyright © 2013, 2015 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-5457685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be
digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.
This document is authorized for use only by David Jacobson in 2016.
For the exclusive use of D. Jacobson, 2016.
514-049
GlaxoSmithKline in China (A)
GSK’s Ethics Policy
All of GSK’s employees received training in the GSK Code of Conduct as part of their induction
into the company, and each year their commitment to the code was recertified. 8 The code of Conduct
stipulated that its employees had to conduct business with “honesty and integrity and in compliance
with all applicable legal and regulatory requirements.”9 The code recognized that GSK operated
under the laws of many different countries and made clear that employees were expected to make
every effort to comply with local laws and norms. The GSK ethics policy required employees located
in every market to demonstrate integrity by:10
Always acting legally and fairly, within the spirit of all laws, regulations and policies
Not offering illegal inducements to anyone
Looking for principles, not loopholes
GSK had a zero-tolerance policy on corrupt practices. The company offered employees a
confidential “Speak Up Integrity” hotline, which could be used to report legal or regulatory breaches,
fraud (including internal control tampering), or any other practice that violated GSK’s Code of
Conduct.11 Senior managers were required to receive training in preventing bribery and corruption at
GSK.12 Managers were responsible for ensuring that their employees received training in ethics and
compliance issues relevant to their job responsibilities.
Health Care in China
China’s Healthcare System
Following the Chinese revolution in 1949, healthcare services were provided to the public by local
communist units (e.g., communes, collective farms, etc.). Life expectancy nearly doubled in the 30
years following the revolution, due mainly to improvements in the sanitation infrastructure and
education regarding basic hygiene. In 1978, China’s “reform and opening up” period of health care
ushered in an era of more modern medical services and hospitals.
In 2013, China did not have a universal healthcare system. Instead, healthcare coverage was
dependent on an individual’s employment. Those who worked for state-owned employers received
inexpensive coverage for themselves and their families, whereas workers in the private sector often
received no coverage at all.13 As a result of legislation by the Chinese government in the 1990s, most
workers who lived in cities were covered by health insurance. 14 Coverage was less complete for
migrant workers (due to location registration issues) and for citizens who lived in rural areas (for
whom basic services in provincial hospitals were covered, but expensive specialists in urban
institutions were not).15 In China, a portion of healthcare expenditures were covered by the
government (around 29% in 2010), while the remainder were paid by individuals out of pocket, or by
social institutions.16
Hospitals in China
In 2011, two-thirds of China’s hospitals were public, and one-third were private.17 Twenty-four
percent of all hospitals were private and for-profit.18 Hospitals employed the majority of China’s 2.3
million doctors, but the salaries they paid were very low. Doctors were banned from taking on
additional jobs to supplement their incomes. 19 Researchers at Peking University estimated that the
salaries of doctors in China would need to double, or even triple, to be equivalent to salaries earned
2
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GlaxoSmithKline in China (A)
514-049
by other professions.20 The Chinese government regulated the prices charged for visits to doctors,
which contributed to their lower pay.21
Hospitals in China earned their revenue from their services: physicians, drugs, laboratory tests,
and other services.22 Hospitals attempted to increase revenue by placing surcharges on drug sales
and encouraging their staff doctors to prescribe them through the use of sales quotas. Between 2009
and 2012, China implemented numerous drug policies with the intent of lowering the prices paid by
consumers.23 Many such policies attempted to regulate the retail prices of pharmaceuticals in China. 24
(See Exhibit 1 for a list of China’s drug policies.) Some of the policies set the retail prices for those
drugs whose costs the Chinese government reimbursed. A cap was also placed on the markup
charged on drugs sold by pharmacies in public hospitals.25 Some experts believed that bribing
hospital staff was common among China’s domestic drug manufacturers. “Domestic companies
actually practice this informal payment approach almost as a common marketing strategy,” said a
researcher at Peking University.26
Traditional Chinese Medicine
Traditional Chinese medicine (TCM) incorporated herbal remedies, acupuncture, massage, and
other measures to treat disease and promote wellness. Herbal medicine was a core tenet of TCM and
used the elements of plants, minerals, and animal products. The elements could be ingested as teas,
tinctures, capsules, or powders. In modern China, TCM and Western healthcare approaches were
used side by side in many hospitals. 27
In 2012, the sales of TCM herbal remedies to consumers were 35.6 billion RMB (or about US$5.5
billion),28 11% more than in 2012.29 Many Chinese consumers believed traditional herbal remedies
had fewer side effects and were healthier than Western pharmaceuticals. In 2012, Infinitus (a Chinese
corporation) held the largest share of China’s market for traditional medicine (over 10% of the value
share).30 Domestic drug manufacturers were well ahead of international companies in developing
and supplying traditional herbal medicines in China, due to their experience with the ingredients
used in TCM and better supply chains for sourcing those ingredients.
China’s Pharmaceuticals
In 2012, China was the third-largest pharmaceutical market in the world, with sales over $69
billion.31,32 It was estimated that the industry would reach $150 billion in sales by 2016. 33 Growth of
the Chinese consumer healthcare industry was expected to continue, as living standards and
disposable incomes increased, and consumers gained greater knowledge of healthcare services. By
2016, China was expected to surpass Japan to become the second-largest drug market in the world,
after the United States.34
In 2012, the Chinese consumer healthcare industry was consolidating, with the top-10 firms
accounting for 28% of the value share for healthcare products sold to consumers. 35 (See Exhibit 2 for
value share of consumer health care by company.) The Chinese pharmaceutical sector grew quickly
after the country joined the World Trade Organization in 2001, because this prompted the entry of
multinational drug companies.36 Many of the world’s top pharmaceutical companies (GSK, Wyeth,
Bayer, and Bristol-Myers Squibb) held portions of China’s market share, although domestic
manufacturers (Amway, Infinitus, and Xian Janssen Pharmaceutical) dominated the top 10.
3
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For the exclusive use of D. Jacobson, 2016.
514-049
GlaxoSmithKline in China (A)
GSK in China
GSK employed 4,000 pharmaceutical salespeople in China in 2012 (with 700 of the employees
hired the prior year).37 GSK’s total employment in China was about 7,000. 38 Abbas Hussain, GSK’s
president international of Europe, Japan, emerging markets, and Asia Pacific (based in London), had
spent 20 years working at Eli Lilly before joining GSK to head the emerging market team in 2008
(under the newly appointed CEO, Andrew Witty). Hussain stressed the importance of accessible
price points for pharmaceuticals and a “bottom-up” approach to design against the needs of
consumers in emerging markets.39 In his role at GSK, he oversaw joint ventures with local consumer
healthcare brands in India and South Africa, as well as the acquisition from Western companies of
branded drugs with expired patents. 40 Mark Reilly managed GSK’s pharmaceutical and vaccines
businesses in China. He began working in China in 2009 as GSK’s general manager of
pharmaceuticals and was appointed senior vice president of GSK’s operations in China in 2012. 41
Both Glaxo and SmithKline Beecham had wholly owned operations in China, established in the
mid-1990s before the merger.42 After forming GSK, the firm’s growth in China was initially spurred
by acquisitions. In 2010, GSK acquired a Chinese drug manufacturer, Nanjing MeiRui Pharma, for
around $70 million.43 MeiRui produced urology and allergy drugs. With the acquisition, GSK
obtained MeiRui’s product portfolio, as well as a manufacturing facility in Jiangsu Province. 44 In
2009, GSK took a 40% stake in a joint venture with a Chinese firm to produce flu vaccines.45 Two
years later, GSK bought out its Chinese partner. The acquisition gave GSK a foothold in the growing
market for vaccines in China.
In 2007, the company laid groundwork for future organic growth by opening a research and
development center in Shanghai, one of only five such centers in the world. 46 In 2013, GSK partnered
with academic institutions and TCM experts in China to integrate TCM knowledge into new drug
development. Zang Jingwu, senior vice president and head of GSK R&D China, said, “We are
developing novel therapeutic TCM mixtures as prescription medicines through innovative extraction
methods and combinations, and we use clinical data/evidence to differentiate from existing TCM
products on the market.”47
Between the mid-1990s and 2007, GSK employed Betsy Li Heng, the daughter of former
Communist Party leader Hu Yaobang, as the director of corporate affairs for the firm’s operations in
China.48 In 2001, an employee of a PR firm that worked with Li in China remarked on the “very
strong government relations department at GSK.” 49
International Regulation of Pharmaceuticals
Multinational drug manufacturers were subject to an array of regulations and laws in the
countries in which they operated. Many large drug companies ran afoul of the law, resulting in
historic settlements totaling millions, even billions, of dollars. (See Exhibit 3 for a timeline of
settlements in drug cases.)
Bristol-Myers Squibb paid a settlement to the U.S. government in 2008 of $389 million. The
charges were brought in part due to illegal kickbacks the firm gave to doctors in the U.S. 50 In 2010,
AstraZeneca paid the U.S. government $520 million for marketing its drug, Seroquel, for unapproved
uses. The fraudulent marketing was facilitated by doctors who were bribed to write false research
papers regarding the drug’s efficacy for the unapproved uses. 51 A year later, Johnson & Johnson paid
the U.S. government $21.4 million for violating the Foreign Corrupt Practices Act (FCPA) by
providing illegal bribes to doctors in Greece, Poland, and Romania.52 In 2012, Pfizer paid the U.S.
4
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GlaxoSmithKline in China (A)
514-049
government $60 million for providing bribes to heath care workers in China (and other countries). 53
Although Pfizer agreed to the settlement, the firm never admitted to or denied the allegations of
bribery. Pfizer stated that the allegations never indicated that its management in the United States
was aware of or approved the actions. 54 The same year, Eli Lilly agreed to pay $29 million to the U.S.
government for illegal payments to foreign government officials in numerous countries, including
China.55 Eli Lilly did not admit to or deny the allegations, even after agreeing to pay the settlement.
Eli Lilly’s chief ethics and compliance officer stated that “Lilly requires our employees to act with
integrity with all external parties and in accordance with all applicable laws and regulations.” 56 In
2013, French pharmaceutical company, Sanofi, was under investigation by the Chinese government
for bribes allegedly paid to over 500 doctors, totaling roughly $277,000 in 2007.57 In the summer of
2012, GSK reached a settlement with the U.S. Food and Drug Administration (FDA) for marketing
drugs for nonapproved uses and bribing doctors in the United States. 58 The scandal resulted in a
settlement of $3 billion, the largest for health fraud in U.S. history. 59
According to nonprofit organization Public Citizen, as of September 2012, the pharmaceutical
industry had paid over $30 billion in settlements with the U.S. federal government and states for
various types of alleged misconduct.60 The recent settlements had brought greater attention to
international laws governing the use of corrupt business practices across national boundaries. Two
pieces of legislation, the FCPA of 1977 in the United States and the Bribery Act of 2010 in the United
Kingdom, both prohibited bribery of government officials in other countries. Companies with
operations in China were also subject to local laws outlawing bribery in b …
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