Glaxo’s China Sales Plunge 61% After Corruption Probe

Glaxo’s China Sales Plunge 61% After Corruption Probe

By Makiko Kitamura  Oct 23, 2013

GlaxoSmithKline Plc (GSK)’s third-quarter sales of pharmaceuticals and vaccines in China fell 61 percent after an anti-corruption probe began there in July, and the drugmaker gave no outlook on how long the downturn would last. Sales of consumer health-care products in China fell 29 percent, the London-based company said today in a statement. Total revenue rose 1 percent to 6.51 billion pounds ($10.5 billion), compared with analysts’ average estimate of 6.64 billion pounds.Glaxo’s woes in China are benefiting rival drugmakers. A “dramatic decline” in Glaxo’s Seretide lung drug and Flixonase nasal spray in the country led to a rapid acceleration in sales of AstraZeneca Plc (AZN)’s Symbicort inhaler, Barclays Plc analysts said last week.

“We very clearly recognize there is a profound need to earn the trust of the Chinese people again, and we will take every action to do so,” Chief Executive Officer Andrew Witty said in a media conference call today. “It is still too early for us to quantify the longer-term impact of the investigation on our performance in China.”

Allegations by China’s government that Glaxo bribed hospitals, doctors and officials prompted Witty to dispatch his head of emerging markets to China to oversee the company’s response.

Growth Opportunity

Glaxo shares fell 2 percent to 1,568.50 pence at 2:10 p.m. in London. Before today, the shares had returned 24 percent this year, compared with a 21 percent return in the Bloomberg Europe Pharmaceutical Index. The stock has risen as Glaxo won approval to sell new medicines.

China accounts for slightly less than 3.5 percent of Glaxo’s global pharmaceutical revenue and is less profitable than its Western businesses, though the world’s most populous nation presents significant growth opportunities, the Barclays analysts said.

Novartis AG (NOVN), Europe’s biggest drugmaker by sales, said this week that sales in China rose 18 percent in the quarter, while Eli Lilly & Co. (LLY) today said sales there increased 11 percent.

In response to the China allegations, Glaxo plans to alter its incentive compensation program for sales people to match changes it made in the U.S., Witty said. Glaxo made the changes just before agreeing to pay $3 billion to resolve U.S. criminal and civil probes into whether it marketed drugs for unapproved uses and other matters.

Right Call

“Our customers are telling us it was the right call,” Witty said. “I’ve got no doubt we will look to export some of the lessons learned from that to other parts of the world.”

While the majority of the drop in sales in China stemmed from the investigation, which drove sales to competitors with similar products, part of the decline also came from an expected slowdown in the vaccines business, Witty said.

“China continues to cast a pall over the company’s emerging markets operations and could have long-standing effects in the country,”Timothy Anderson, an analyst at Sanford C. Bernstein & Co. in New York, wrote in a report.

While it’s too early to make judgments on possible fines from the Chinese government, the company has sufficient legal provisions given the information gathered so far, Witty said.

Third-quarter earnings excluding some items were 28.9 pence a share. That compared with the average estimate of 27.2 pence from 17 analysts surveyed by Bloomberg.

Drug Approvals

The company maintained its forecast for the year as growth in other regions offset declining sales in China. In April, the company said it seeks to boost sales 1 percent this year and earnings per share by 3 percent to 4 percent.

Drugmakers including Novartis, Amgen Inc. (AMGN) and Johnson & Johnson (JNJ) raised their full-year forecasts this quarter. Roche Holding AG last week maintained its 2013 forecast.

Glaxo and partner Theravance Inc. (THRX)’s lung drug Anoro last month won the backing of a U.S. advisory panel, which augurs regulatory approval by December. A nod for Anoro by the Food and Drug Administration would be Glaxo’s fifth this year. It’s unlikely any other major drugmaker globally will come close, according to Sam Fazeli, an analyst at Bloomberg Industries in London.

Breo and Anoro are of particular interest to investors as follow-up drugs to Seretide, which had about $8 billion in sales last year and may face generic competition following the expiration of the inhaler device’s patent in 2016. Seretide is marketed as Advair in the U.S. and had 1.2 billion pounds in sales in the third quarter, down 1 percent from a year earlier.

Glaxo is the U.K.’s biggest drugmaker. The second-biggest, AstraZeneca, reports third-quarter results Oct. 31.

For Related News and Information: Glaxo’s Record Approvals Boost Morale as China Probe Drags

To contact the reporter on this story: Makiko Kitamura in London at


Glaxo’s Chinese Sales Plummet

Fall Comes in Wake of Bribery Probe by Chinese Authorities


Updated Oct. 23, 2013 9:31 a.m. ET

LONDON— GlaxoSmithKline GSK.LN -1.62% PLC’s pharmaceutical and vaccine sales in China fell 61% in the third quarter, as a high-profile bribery investigation into the companyhurt its ability to sell drugs.

Global sales in the quarter were flat at £6.51 billion ($10.57 billion). Net profit fell 12% to £969 million, or 20 pence a share, from £1.11 billion, or 22.6 pence a share, in the year-earlier quarter.

Although China represents a modest 4% of Glaxo’s global drug sales, it has been an important source of revenue growth for the company in recent years, usually delivering sales gains in the double-digit percentages.

The company’s China business was thrown into disarray this summer, however, when authorities accused Glaxo of bribing doctors, hospitals and government officials in an effort to sell more drugs at higher prices. The company has said it appears that some of its senior managers in China may have broken the law. Glaxo says it is cooperating with investigators, who have detained some of the company’s Chinese staff. Police also have asked the company’s former China chief, a Briton, not to leave the country while the investigation proceeds.

In a conference call with journalists Wednesday, Glaxo Chief Executive Andrew Witty said the probe has created “anxiety” in China that has “led to some disruption in the business.” He said that doctors have a choice of which drugs to prescribe where there are similar medicines available, suggesting that some doctors may be hesitant to prescribe Glaxo drugs at the moment.

He declined to comment on the state of the investigation, or to give much detail about what changes, if any, the company has made to its marketing practices in China. Mr. Witty said the company remains committed to its business in China but has “work to do” to “earn back the trust of the Chinese people.”

Although they’ve focused largely on Glaxo, Chinese authorities also have scrutinized other drug companies in recent months, creating a general climate of caution in the country. In a report this week, consultancy McKinsey & Co. said some Chinese hospitals now are restricting access to drug sales representatives.

Industry analysts say some drug companies have ratcheted back their marketing practices as a result, which they say is likely to affect the industry’s third-quarter sales in the market. Last week, however, Swiss drug companies Novartis AG NOVN.VX +0.36% and Roche Holding AG ROG.VX +0.65% both reported growth in Chinese sales. Novartis said China sales grew 18% in constant currencies over the previous year’s quarter, compared with 25% year-over-year growth in the second quarter. Novartis Chief Executive Joe Jimenez said the Chinese crackdown has affected market growth for the industry, but he said he didn’t expect the effect to be permanent.

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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