Last checked at 
By Adam Jourdan and John Ruwitch
SHANGHAI, May 18 (Reuters) - Chinese corruption chargesagainst executives of British drugmaker GlaxoSmithKline Plc(GSK) could be just the start of the pharmaceuticalindustry's problems in its biggest emerging drugs market,according to industry sources in China.
The charges relating to GSK executives, accused offunnelling hundreds of millions of dollars in bribes to doctorsand health officials via travel agencies, were announced byChinese authorities last week, the culmination of a 10-monthpolice investigation.
But the GSK case is unlikely to represent closure for thedrugs industry in China, which is set to become the world'ssecond-biggest pharmaceutical market behind the United Stateswithin three years according to consultancy IMS Health.
Drug-company executives, sales staff, lawyers and complianceexperts say China's crackdown on drugmakers and other healthcarefirms is intensifying as prosecutors grow bolder in the wake ofthe GSK case, threatening to stymie the growth of any firmscaught in the crosshairs of the prolonged corruption crackdown.
"The investigation against GSK may be coming to a close, butthese types of probes in the pharmaceutical sector are becominga weekly occurrence," a sales rep for the Chinese unit of amajor global drugmaker said. He requested his name and hisfirm's name be withheld due to the sensitivity of the topic.
After a series of probes against foreign drugmakers lastyear, a range of government bodies, including the state planningagency, local commerce bureaus and the health ministry aremaking frequent, sometimes unannounced spot-checks at foreignhealthcare firms, risk consultants and lawyers said.
Lawyers estimate that more than half of all drugmakersoperating in China are being investigated in some capacity, fromlarge multinational firms to Chinese state-owned enterprises.
The impact of an investigation can be significant.
GSK's revenues in the country plunged 61 percent in thethird quarter last year and were still down by 20 percent in thefirst quarter of 2014 from a year earlier. Official Chinesemedia said on Friday that the firm might have suffered"irreparable damage" in the Chinese market.
Legal sources and one source with direct knowledge of theGSK investigation said China's authorities might still try tocharge the company itself, which could potentially put GSK'sbusiness licences to operate in China at risk.
GSK said in a statement on Wednesday that the firm wanted"to reach a resolution that will enable the company to continueto make an important contribution to the health and welfare ofChina and its citizens".
A London-based spokesman declined to elaborate on Friday.
KNOCKING ON DOORS
Chinese authorities, led by the State Administration forIndustry and Commerce (SAIC) and the country's public securitybureau (PSB), are ramping up their visits to foreign drug firms.
"We have certainly been made aware from clients thatinspection visits by various government agencies have increasedand these visits are now more focused," said risk consultant BobYouill, Shanghai-based managing director at FTI Consulting.
Authorities are looking to unearth proof that firms haveviolated anti-corruption laws or artificially inflated drugprices, a sensitive theme as China's leaders look to provideaffordable healthcare to the country's near-1.4 billion people.
Last year authorities visited large international drugsmanufacturers including Novartis AG, AstraZeneca Plc, Sanofi SA, Eli Lilly & Co and BayerAG as part of a broad investigation into the sector.
Bayer said its contacts with regulators were within thenormal range. Johnson & Johnson spokesman Ernie Knewitzsaid he was unaware of any "new developments" in China.
Chinese subsidiaries of U.S. drugmaker Merck & Co Inc "have received and may continue to receive inquiriesregarding their operations from various Chinese governmentalagencies", Merck spokesman Steven Cragle said via email.
Pfizer Inc said that it regularly interacted withgovernment and regulatory agencies in China "to discuss avariety of issues, including patient access, regulatory andcompliance matters, and anti-counterfeiting measures".
Roche Holding AG said it had not been contacted orinvestigated by Chinese authorities over allegations ofcorruption, while a Novartis spokeswoman said she was not awareof any contact from authorities in China around corruption.
AstraZeneca, Sanofi and Eli Lilly did not have any immediatecomment.
Lawyers and consultants say a case as severe as GSK isunlikely to be repeated anytime soon, but that the chargesagainst the British firm are likely to open the floodgates to anumber of smaller corruption probes throughout the sector.
Chinese police charged GSK's former China boss, Briton MarkReilly, and two other colleagues with corruption on Wednesdayafter the probe found the firm had made billions of yuan frombribing doctors and hospitals.
"Just this morning we are starting with three new complianceinvestigation cases," John Huang, Shanghai-based partner at lawfirm MWE China, told Reuters last week. China's PSB and SAICwere actively visiting drug firms, he said.
"We're being asked to do training on how to deal with dawnraids, how to act when people are being arrested, and howindividuals should respond to police investigations."
COMPLIANCE BOOST
In turn, companies are looking to boost internal compliancesystems and training, company insiders and lawyers said.
"My company's compliance systems have always been strict,but recently there have been more detailed regulations, withmore all-encompassing rules and lots of internal probes," said asecond China-based sales rep at a large U.S. drugmaker.
This has been a boon for compliance lawyers and riskconsultants, said Nat Edmonds, a partner at law firm PaulHastings and a former Foreign Corrupt Practices Act litigator atthe U.S. Justice Department.
"The amount of resources companies are putting into this hasincreased exponentially," Edmonds told Reuters in Shanghai.
The issue for drugmakers - both Chinese and foreign - isthat China's healthcare system is widely accepted to be riddledwith bribery and corruption. Graft is often used to smoothbusiness ties between sales reps and doctors.
Without these illicit payments many companies would struggleto compete, lawyers and company insiders said.
This would pose a challenge for firms as they look to hitsteep sales targets under the glare of Chinese watchdogs.
"The whole industry is going to get more and moreregulated," said a source with direct knowledge of the GSKinvestigation. (Additional reporting by Ben Hirschler in LONDON, CarolineCopley in ZURICH, Ludwig Burger in FRANKFURT, Bill Berkrot andCaroline Humer in NEW YORK; Editing by Mark Bendeich)
