Bribery scandal slashes GlaxoSmithKline's Chinese drug sales

LONDON Wed Oct 23, 2013 10:19am EDT

The signage for the GlaxoSmithKline building is pictured in Hounslow, west London June 18, 2013. REUTERS/Luke MacGregor

The signage for the GlaxoSmithKline building is pictured in Hounslow, west London June 18, 2013.

Credit: Reuters/Luke MacGregor

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LONDON (Reuters) - GlaxoSmithKline's drug sales in China slumped 61 percent in the third quarter, hit by a bribery scandal that damaged its ability to market products in the country and pushed some sales into the hands of rivals.

Chief Executive Andrew Witty said GSK's China business had suffered most where other drug options were available - as with its top-selling lung medicine Advair/Seretide, for which AstraZeneca's Symbicort is an alternative treatment.

The fall in Chinese sales, described by Deutsche Bank analysts as "dire", was steeper than investors expected and Witty told reporters it was too early to say when business might recover from the Chinese-government probe into allegations that GSK had bribed doctors to boost drug sales.

GSK could also end up facing hefty fines, although Witty said he believed existing legal provisions were sufficient - and he stressed there was "absolutely no question" of GSK pulling out of China.

"We are totally committed to China," he told reporters in a conference call on Wednesday. "This is a very important business to GSK. China is a critically important country of the future."

Although Britain's biggest drugmaker generates less than 4 percent of its sales in China, it has invested heavily in the country, where it employs 7,000 staff and has five factories and a research centre.

Worldwide, GSK's sales were flat at 6.51 billion pounds ($10.6 billion) in the quarter, generating core earnings per share (EPS) of 28.9 pence, 10 percent higher than a year ago.

Analysts, on average, had forecast sales of 6.65 billion pounds and core EPS, which excludes certain items, of 27.2p, according to Thomson Reuters.

The higher-than-expected earnings number reflected lower costs, including reductions in spending on research and development (R&D) as several expensive late-stage clinical trials reached a conclusion. Witty said the trend of lower R&D costs was likely to continue into 2014.

GSK also made savings on post-retirement healthcare benefits for its staff.

The sales shortfall, however, knocked the shares 2 percent lower by 1330 GMT in a flat European sector for healthcare stocks.

The company reiterated that it expected sales growth for the year to be around 1 percent in local currency terms, with EPS rising by between 3 and 4 percent.

TARNISHED REPUTATION

GSK's reputation has been tarnished and its management team in China left in disarray by Chinese police allegations in July that it funneled up to 3 billion yuan ($490 million) to travel agencies to facilitate bribes to doctors and officials.

Industry insiders and analysts had been expecting that the police probe - one of Beijing's biggest into a foreign company - would dent sales significantly in the three months to September, perhaps by around 30 percent.

In the event, Chinese sales of pharmaceuticals and vaccines were down 61 percent in the quarter to 77 million pounds.

Other multinational drug companies are also being investigated but GSK has suffered the most damage from the scandal as many Chinese doctors have shunned its sales representatives.

Swiss rivals Roche and Novartis, by contrast, both saw continued growth in their Chinese drug sales in the third quarter.

Although China accounted for only 3.6 percent of GSK's global drug sales last year, the company has been investing heavily in the country. Before the scandal, GSK's China sales rose 14 percent year-on-year in the three months to end-June.

Emerging markets are an important plank of Witty's growth strategy as he grapples with slower uptake of GSK's products in the developed world.

GSK has recently seen some encouraging progress with its pipeline of new drugs - including approvals this year for new treatments for lung disease, cancer and HIV - but austerity pressures in Europe remain a drag on sales and profits.

Traditionally, GSK has been particularly strong in respiratory medicine and analysts at Berenberg Bank said the commercial roll-out of its new lung drug Breo in the United States last week should reassure investors.

(Editing by Keith Weir and Elaine Hardcastle)

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Comments (1)
bettysenior wrote:
When China decided to take GSK to task they were not doing this because they caught the transnational with their hand in the till or its equivalent, but to fire a shot over the bows of all the pharmaceutical giants not to mess around with China, projected to become the largest economy in another 9 years or so. Indeed as western governments have not ‘really’ taken these concerns to task when they have been found out for corrupt practices et al, even though China is a people-controlling state, someone has to stand up to them. In this respect according to the WHO pharmaceutical global sales to governments (not including the private sector) amounted too $4.1 of public spending – http://www.investorschronicle.co.uk/2013/10/17/comment/chronic-investor-blog/the-ethics-of-pharma-kPawzkABd2K6Fxth9PfVnL/article.html

Therefore the $14 billion in fines that the big 7have paid out in out of court settlements over the last 5 years is sheer peanuts. But it is no wonder that they operate in this way as their roots are based in near unspeakable times – http://foolscrow.wordpress.com/2010/07/27/return-to-nuremberg-big-pharma-must-answer-for-crimes-against-humanity/

Therefore even though I am not a supporter of China as they are on the road to economic monopoly, they are by holding these giant corporates to account, doing humanity a great service. I just wished that western governments had taken them to task and made them pay at least $50 billion for their previous illegal actions. Unfortunately as politicians are bought and sold in the West it is just a pipedream that I am having. One thing again about China, on past history their politicians are not for sale and if they are, they can either get executed or spend the rest of their life in a repressive Chinese jail. Indeed, it’s a pity that China can’t deal with out bankers, as we might have a more incorrupt financial system in the West.

Dr David Hill
World Innovation Foundation

Oct 27, 2013 12:01pm EDT  --  Report as abuse
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