* Two Chinese execs also charged with bribery-Xinhua
* Charges seen harsher than expected
* Most high profile foreign bribery scandal since 2009 (Updates share price, adds context)
By Megha Rajagopalan and Kazunori Takada
BEIJING/SHANGHAI, May 14 (Reuters) - Chinese police onWednesday said they had charged the former British boss ofdrugmaker GlaxoSmithKline PLC's China business and othercolleagues with corruption, after a probe found the firm madebillions of yuan from elaborate schemes to bribe doctors andhospitals.
Mark Reilly and two Chinese executives, Zhang Guowei andZhao Hongyan, were also suspected of bribing officials in theindustry and commerce departments of Beijing and Shanghai, theofficial Xinhua news agency reported, quoting police in Hunanprovince.
The case is the biggest corruption scandal to hit a foreigncompany in China since the Rio Tinto affair in2009, which resulted in four executives, including anAustralian, being jailed for between seven and 14 years.
GSK is Britain's biggest drugmaker.
"(GSK) departments offered bribes to hospitals and doctorsas well as personnel to boost their sales. The money involvedwas in the billions of yuan," a Ministry of Public Securityofficial told a press conference in Beijing.
The charges - which carry a maximum sentence of life inprison in the case of bribery - were seen as harsher than manyindustry insiders and China-based foreign executives hadexpected.
Officials gave no specific details on the amount of bribespaid or exactly how much the company had illegally earned,although they had previously accused the firm of funneling up to3 billion yuan ($482 million) to travel agencies to facilitatebribes to doctors and officials.
GSK said it was cooperating with the authorities.
"We take the allegations that have been raised veryseriously. They are deeply concerning to us and contrary to thevalues of GSK," the drugmaker said in a brief statement issuedin London, its headquarters.
"We want to reach a resolution that will enable the companyto continue to make an important contribution to the health andwelfare of China and its citizens."
Shares of London-listed GSK were trading down one percent,underperforming a 0.2 percent drop in the broader FTSE 100 index.
GSK has said that some of its senior Chinese executivesappeared to have broken the law. It has also said it has zerotolerance for bribery, calling the allegations in China"shameful".
Reilly briefly left China when the scandal broke in Julylast year but voluntarily returned to cooperate with police.Attempts to reach him on Wednesday were unsuccessful. He wasreplaced as GSK's China head on July 25 last year, 10 days afterthe initial Chinese police accusations.
A spokesman for the British consulate in Shanghai saidofficials were in regular contact with Reilly and were providingconsular assistance. The spokesman declined to comment onReilly's whereabouts.
FOREIGN EXECUTIVES SURPRISED
The charges against the British executive shocked thebusiness community as GSK had previously said it believed thealleged corruption involved senior Chinese staff only.
Kenneth Jarrett, president of the American Chamber ofCommerce Shanghai, said he was surprised at the "strongresponse" from the police.
"I would agree that it's not what I would have expectedbecause it seemed like GSK were cooperating very closely withthe authorities," he told Reuters.
"I don't think that anyone had been lulled back intocomplacency, but if anybody had this will wake them up," Jarrettadded. The GSK scandal had spurred many foreign corporations inChina to increase vigilance against bribery.
Other large international drugs manufacturers includingNovartis AG, AstraZeneca Plc, Sanofi SA, Eli Lilly & Co and Bayer AG werealso visited by Chinese officials in 2013 as part of a broadinvestigation into the business.
The allegations against GSK have damaged its reputation,thrown its China management team into turmoil and forced it tochange its China business model, although the firm says headoffice had no knowledge of alleged wrongdoing.
China is a key growth market for large drugmakers, which arecounting on its swelling middle class to offset declining salesin Western countries. China is set to be the second-biggestpharmaceuticals market behind the United States within threeyears, according to consultants IMS Health.
But bribery between sales staff and doctors is rife in theworld's second-biggest economy, and it remains to be seenwhether the GSK case will be a one-off or the first of a broadercampaign to clean up the Chinese health sector.
Reilly and the executives were charged with corporatebribery, bribing non-government officials and bribing businessunits.
Chinese officials on Wednesday made no mention of possiblesanctions against GSK itself, although Xinhua said the firm hadforged accounts, faked transactions to inflate revenue, pressedsales staff to engage in bribery and tried to cover its tracks.
"Later they could bring an action against the company andseek penalties against the company and I wouldn't be surprisedif they did that actually, because the claim is so egregiousthat the company could be charged and fined," said StevenDickinson, Qingdao-based partner with law firm Harris Moure.
"But the thing is you can't put a company in jail and theywant someone in jail. They want Mr. Reilly in jail for about 10years. That's what they're looking to do," he added.
Any bribery charges against GSK as a company could also leadto the authorities stripping it of its business licenses.
BUSINESS IMPACT
GSK's revenue in China leapt to 6.9 billion yuan ($1.11billion) in 2012 from 3.9 billion yuan in 2009, the first yearthat Reilly headed operations, Xinhua said.
Before the scandal, GSK's China sales had risen 14 percentyear-on-year in the three months to end-June, but revenue in thecountry plunged 61 percent in the third quarter. Since then, thedecline has moderated but sales were still down by 20 percentfrom a year ago in the first quarter of 2014.
Since the bribery scandal, GSK has announced an overhaul ofits sales and marketing practices worldwide in a bid to preventfuture wrongdoing. The company, however, has continued to facecorruption allegations in other countries and is nowinvestigating claims that bribes were also paid to doctors inPoland, Iraq, Jordan and Lebanon.
In an attempt to clean up its reputation, GSK aims to becomethe first company in the drugs industry to stop paying outsidedoctors to promote its products. It also wants to end paymentsfor medics to attend conferences and separate incentives forsales representatives from individual sales targets.
A key challenge in the process, which is due to be completedby 2016, is how to make the transition without ceding businessto rivals in the $1 trillion-a-year global drugs industry.
The crackdown on GSK reflects a growing determination byChinese authorities to stamp out corporate bribery andcorruption, which can drive up prices for consumers.
"This GSK case is very well-known in the public domain,drawing everyone's attention. The government wants to kill thechicken to scare the monkey and I think this will have a rippleeffect," said Shanghai-based lawyer John Huang, co-founder andmanaging partner at MWE China. ($1 = 6.2291 Chinese Yuan) (Additional reporting by Ben Hirschler in LONDON, Adam Jourdanand John Ruwitch in SHANGHAI and Michael Martina in BEIJING;Editing by Stephen Coates, Miral Fahmy and Mike Collett-White)
Glaxosmithkline (GSK)
