LONDON— GlaxoSmithKline PLC said Friday that a Chinese court found its subsidiary in the country guilty of bribing nongovernment personnel and fined the company close to £300 million ($491.5 million).
The penalty is the largest ever corporate fine in China, according to the official Chinese news agency Xinhua, and draws a line under an issue that has hung over the U.K. drug maker for more than a year. Chinese authorities initiated investigations against the company last June.
"The illegal activities of GSKCI [GSK China Investment Co. Ltd.] are a clear breach of GSK's governance and compliance procedures; and are wholly contrary to the values and standards expected from GSK employees," GSK said in a statement Friday.
The company added that it has cooperated fully with the authorities and has taken steps to comprehensively rectify the issues identified at the operations of the unit. Glaxo issued a separate apology to the people of China in English and Mandarin on Friday, saying "GSK PLC sincerely apologizes to the Chinese patients, doctors and hospitals and to the Chinese Government and the Chinese people."
Separately, Xinhua, China's main state media outlet, reported that Glaxo's former China head, Mark Reilly, was sentenced to three years in prison, though it also reported the sentence was suspended for four years. Xinhua didn't disclose details of the legal procedures surrounding Mr. Reilly, including what he was charged with and what he plead to the charges. He couldn't be reached for comment.
The fate of the British national wasn't immediately clear. Chinese legal experts said that, according to established procedure, Mr. Reilly would be required to remain in China for the four years his sentence is suspended.
Mr. Reilly was the former head of Glaxo's China business. Although he stepped down from his position shortly after authorities launched their investigation, he remained a Glaxo employee.
Mr. Reilly has been in China for about a year, after saying he was returning there to help Chinese authorities probing the case. The company didn't comment on Mr. Reilly's sentence in a statement early Friday.
Chinese authorities in May accused Mr. Reilly of ordering his subordinates, his sales team and other employees to bribe hospital doctors, health-care organizations and other parties on "a large scale" to boost Glaxo's drug sales in China. That helped Glaxo reap billions of yuan in additional revenue between 2009 and 2012, they said.
"Reaching a conclusion in the investigation of our Chinese business is important, but this has been a deeply disappointing matter for GSK. We have and will continue to learn from this," Chief Executive Andrew Witty said in a statement Friday.
The company reiterated that it remains "fully committed" to China. The country makes up less than 5% of group sales, but before the investigation started was an important and fast-growing market for the drug maker.
Glaxo said the fine would be funded out of existing cash resources, and the charge would be included in its third quarter update. While the total fine is large, it is dwarfed by Glaxo's latest quarterly earnings of £1.4 billion. In China alone its latest quarterly sales were around £60 million.
But the fine will increase pressure on Mr. Witty, whose six-year tenure as chief executive has been marked by a move to expand the company further into emerging markets.
Some investors spoken to by The Wall Street Journal have started to question Mr. Witty's performance, questioning whether the China issues might represent a systemic problem for Glaxo, as well as expressing concern over the company's recent weak U.S. sales and slow new drug launches.
Separately, Glaxo has been investigating claims that its employees bribed doctors in Iraq, Jordan, Lebanon and Syria.
Glaxo could still potentially face a fine in the U.S. or U.K. The U.K.'s Serious Fraud Office opened a criminal investigation into the commercial practices of Glaxo in May. The U.S. Securities and Exchange Commission and the Justice Department are both investigating the company, according to people familiar with the matter.
Investors didn't take fright at the fine Friday, with Glaxo's shares up just under 1%, in line with gains seen for drug company peers AstraZeneca PLC and Roche Holding.
Friday's sentences and fine come amid what business groups say is an increasingly chilly environment for foreign companies in China.
Last month a Shanghai court convicted two foreign private investigators who had worked for Glaxo for illegally purchasing personal information on Chinese citizens. The case raised questions about the limits of due diligence and other efforts to collect information in China, a market where industry data and corporate and executive backgrounds can be hard to come by.
In recent weeks the U.S. Chamber of Commerce and other business groups have criticized what they said was a singling out of foreign companies for a growing number of antitrust probes. The probes have ensnared a number of foreign car and car-parts makers as well as technology companies such as Microsoft Corp. and Qualcomm Co. The companies have said they will cooperate and abide by Chinese law.
China has said it treats foreign and domestic parties equally according to the law and that stepped-up enforcement is part of an effort to help consumers and to bring more market forces into its economy.
In August, foreign direct investment in China reached its lowest level in more than four years, a drop experts attributed to China's slowing economic growth as well as nervousness by some foreign companies. But they said the slowdown is likely to be temporary given that China remains a solid growth market with a growing consumer base.
The Wall Street Journal September 19, 2014