GSK – affordable medicine with social and financial costs?

The company’s costly ESG report card suggests investors should be asking if the company has a governance oversight problem.

As details emerge of the £300m bribery and corruption investigation of GlaxoSmithKline (GSK) in China, the question is whether this is an isolated incident or endemic. GSK says the Chinese allegations – which it has in part accepted – that Chinese doctors were bribed with cash and sexual favours in return for prescribing the company’s drugs, would be a clear breach of its governance procedures, values and standards. The charges have also been levelled at other pharma companies operating in China. For its part, GSK says it has “zero tolerance” for fraudulent behaviour. However, the company has consistently found itself facing controversies on its clinical trials, unethical marketing and sales strategy, unreliable research and faulty governance practices. These have been marked by multiple large fines. The issues remain the same, the market varies. Despite its protestations, GSK’s record indicates a gross disregard of its ESG performance both within stringently regulated developed markets and more loosely supervised emerging markets. We have recorded 56 unique controversial events on our emnews database involving GSK since 2011; the highest among all pharmaceutical companies during the period. In addition, our research has unearthed human rights concerns in clinical trials being conducted in India. Stakeholders volunteered information that the company was using India as a clinical testing ground, even as the tested drugs and resultant benefits would remain out of reach to most people due to high pricing. Such testing is not permitted by international compliance agreements such as the World Medical Association Declaration of Helsinki, but was being conducted in India where the regulatory system permits unethical trials regardless of the ensuing benefits to the home market.Similar practices between 2007-2012 led to 14 fatalities in Argentina where a clinical trial for a pneumonia vaccine on nearly 25,000 babies in Latin America attracted a $93,000 fine for forceful consent from parents, with the company going back on basic formalities such as providing forms in local languages. In Puerto Rico, the company has faced flak twice, once for covering up contamination at a production facility in 2010 and then for mislabelled packaging & incorrect dosages in Paxil tablets. Cumulative financial implications for both exceeded $800m. Irregular business practices have marked GSK’s operations as well. Similar to the Chinese controversy, in 2002 gifts were extended to doctors to increase prescriptions in Italy and Germany. In 2003, the company was accused of renaming its products so as to charge U.S Medicaid an additional $89m. In 2011, the South Korean Fair Trade Commission fined the company $2.6m for colluding with local producers to limit supply and artificially inflate prices from 2002 onwards. The company earned profits amounting to KRW 16m from the same practice. Similar practices in the U.S earned GSK a record high $3bn fine in June 2012 for failing to provide the US Food and Drug Administration with safety data and for aggressively marketing anti-depressant products to underage patients. That was followed by an investigation by the UK Office of Fair Trading in April 2013, for anti-competitive policies that included pay-outs to peers such as Alpharma, Genetics UK and Norton Healthcare to delay production of cheaper variants of anti-depressants from 2001-2004. Amidst all this, the company’s research facility in Shanghai was in the news for misrepresenting data in research papers, which led to

the dismissal of its Head of Research & Development in China in June 2013. The report card suggests that GSK has faced a governance challenge since its formation in 2000. These concerns are ongoing, given that it is involved extensively around the world in valuable Public Private Partnerships (PPPs) with governments and affordable medicines programmes in developing countries. GSK regularly offers cheaper drugs, either through tie-ups with governments or flexible payment options such as monthly repayments. Of the 49 Least Developed Countries (LDCs) in the world, 34 take GSK’s products at a 75% marked down price. Middle-income countries enjoy other benefits such as positive price discrimination for senior citizens & disabled persons. Thus, the company provides cheaper alternative drugs in the open market coupled with a strong association with PPP initiatives. In 2012, medicines valued at £131m were donated; an admirable policy. A criticism of GSK, however – backed up its legal problems – is that the strategy creates demand for products through pilot access, which then turns to aggressive marketing.A natural fall out of the consistent supply of medicines at below market rates is that costs need to be reduced through the outsourcing of trials, research and now manufacturing to these same developing countries. To this end, the company announced the Operational Excellence Restructuring programme in 2007 that reportedly led to annual savings of GBP 2.5bn. Another programme which would implement further cost saving measures in the manufacturing line and R&D businesses was introduced to create an additional GBP 1 billion savings by 2016. Going by the company’s historical performance, a large amount of this saving may compromise its basic commitments towards ethical trials, responsible marketing and relations with healthcare professionals. The company’s problems in markets such as the U.S and U.K that possess tight industry regulations and active civil society involvement are of major concern. But the potential for damage is much larger in emerging markets where future growth prospects are much higher.
Sauravh Dubey is a Senior Analyst at Solaron Sustainability Services