GlaxoSmithKline Plc (GSK) Chief Executive Officer Andrew Witty said an anti-corruption probe in China will probably hurt the drugmaker's sales there in his first public statement since the investigation was disclosed.
"We are likely to see some impact to our performance in China as a result of the current investigation, but it is too early to quantify the extent," Witty said in a statement today. "We are co-operating fully with the Chinese authorities in this matter."
Glaxo's sales in China rose 14 percent in the second quarter to 212 million pounds ($325 million), the London-based company said in the statement. China accounts for slightly less than 3.5 percent of the company's global pharmaceutical revenue and is less profitable than its Western businesses, according to Mark Clark, an analyst at Deutsche Bank AG in London. Glaxo had sales of about 1 billion pounds in China last year.
Allegations this month by the Chinese government that Glaxo bribed hospitals, doctors and health officials prompted Witty to dispatch his head of emerging markets to China to oversee the London-based drugmaker's response, which included a statement that some senior executives may have broken the law. Glaxo had said in June that it found "no evidence of corruption or bribery" there after a four-month internal investigation.
Detained Executives
The probe "will slow down growth a bit in China, but it won't irreparably damage the business there," Alistair Campbell, an analyst at Berenberg Bank in London, who has a buy recommendation on Glaxo shares, said in a telephone interview. "Glaxo has a healthy portfolio of products. It's also such a small percentage" of Glaxo's overall sales.
China detained four senior Glaxo executives on suspicion of economic crimes, the ministry said July 15. Its finance chief in China, Steve Nechelput, has been unable to leave the country since the end of June because of the investigation, though he hasn't been arrested or questioned, the company said last week. Mark Reilly, the head of Glaxo's China pharmaceuticals business, returned to the U.K. on a planned business trip, according to the company.
Glaxo's executives "violated China's laws and damaged markets by engaging in bribery to raise drug prices, expand sales and reap inappropriate profits," the Ministry of Public Security said in a statement posted on its website July 22. Abbas Hussain, Glaxo's head of emerging markets, apologized on behalf of Glaxo and pledged to cooperate with the investigation, the ministry said, citing a recent meeting with the executive and his colleagues.
Reviewing Operations
Glaxo is reviewing how it operates in China, according to Hussain. "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," he said this week.
Glaxo today reported second-quarter earnings excluding some items were 26.3 pence a share, compared with 26.1 pence a year earlier. That compared with average estimate of 26.3 pence from 14 analysts surveyed by Bloomberg. Sales rose 2 percent to 6.6 billion pounds, meeting the average analyst estimate.
Revenue from consumer health-care products in China continued to decline, mainly because of new shelving requirements for the Contac cold and flu treatment and mandatory price reductions for Fenbid, an over-the-counter pain medication, Glaxo said.
Sales of Seretide, the company's top-selling lung medicine, were 1.36 billion pounds, with "strong growth in China" and other emerging markets, Glaxo said.
Glaxo rose 0.5 percent to 1,680 pence at 12:33 p.m. in London trading. The stock has gained about 29 percent this year, including reinvested dividends.
To contact the reporter on this story: Makiko Kitamura in London at mkitamura1@bloomberg.net
To contact the editor responsible for this story: Phil Serafino at pserafino@bloomberg.net
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