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How China's Probe of GlaxoSmithKline Could Play Out

Stocks in this article: GSK

"Certain senior executives of GSK China who know our systems well appear to have acted outside of our processes and controls which breaches Chinese law," Glaxo international executive Abbas Hussain, Glaxo's president, International -- Europe, Japan, Emerging Markets & Asia Pacific, said in a statement. "We have zero tolerance for any behavior of this nature."

The company is hinting at an in-house remedy rather than a harsher penalty.

"We will actively look at our business model to ensure we make a significant contribution to meeting the economic, healthcare and environmental needs of China and its citizens," Hussain says. "Savings made as a result of proposed changes to our operational model will be passed on in the form of price reductions, ensuring our medicines are more affordable to Chinese patients."

Share prices of GlaxoSmithKline, which makes everything from Sensodyne toothpaste to advanced cancer drugs, paled slightly last month but have held up on the whole.

I'd put my health in the hands of this scenario. But if the Chinese government aims to use GSK's case to prove some point to a bigger swathe of people about the country's legal or business climate, I expect something else to happen:

Scenario 2. GSK's stated commitment to work closely with the cops fizzles because the cops are under pressure to net as many employees for as many alleged crimes as possible. They might force confessions (still the local policing style) and give incentives for workers who tattle on one another. Then they would publicly compare the company's top China people to a major illness. Someone might get locked up for a while.

In addition to the arrests so far, authorities have barred a U.S. national believed linked to the case from leaving China. There's also a fair sum at stake: 3 billion yuan ($489 million) supposedly allocated to bribe money over the past six years, the official China Daily newspaper reports.

For a parallel case against a foreign firm in China, remember Australian miner Rio Tinto (RIO). In 2010, four of its executives, including a foreign national, were sent to jail for taking bribes and stealing commercial secrets.

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