Jul 17, 2013

    GSK scam may not hurt China business

    GLAXOSMITHKLINE'S sales in China jumped 20 per cent to about £1 billion (S$1.9 billion) last year, almost quadruple the pace of growth across its emerging markets. Police said bribes and sexual favours spurred the gain.

    The drug-maker now faces allegations of economic crimes involving 3 billion yuan (S$613 million) of spurious travel and meeting expenses, and trade in sexual favours, the Public Security Ministry said on Monday.

    The allegations are "shameful" and would be a breach of the company's systems and values, Glaxo said in a statement.

    Bribes paid to hospitals, doctors and health officials to solicit sales helped boost the firm's revenue, according to the ministry, which controls China's police.

    Mr Fabian Wenner, a health-care analyst at Kepler Capital Markets in Zurich, said that, if found guilty, Glaxo could be ordered to pay a penalty equating to only a fraction of its sales in China, the world's fastest-growing major pharmaceutical market.

    "While being involved in criminal offences and associated with illegal actions is clearly damaging for GSK's reputation, I doubt that this will be of material impact for the company," Mr Wenner said.

    He said that Kepler Capital Markets estimated Glaxo may have to pay US$5 million to US$10 million to settle the matter, based on fines paid in China for similar violations, "implying close to no impact for the shares".

    "I haven't spoken to any investor who is concerned about this yet," he added.

    Glaxo's stock rose 31 per cent this year, compared with a 17 per cent gain in the Bloomberg Europe Pharmaceutical Index.

    In December, Eli Lilly and Company agreed to pay US$29.4 million to settle US Securities and Exchange Commission allegations that employees gave cash and gifts to officials in China, Brazil, Russia and Poland to win millions of dollars in business.

    In August, Pfizer, the world's biggest drug-maker, agreed to pay US$60.2 million to settle foreign bribery cases that it disclosed to the United States authorities involving alleged payments by employees and agents of subsidiaries, including those in China.

    "As GSK supplies a range of important drugs for public health, we doubt that there will be an enduring impact on its business in China," wrote Deutsche Bank AG's London-based analyst, Mr Mark Clark, in a June 12 note to clients.

    Glaxo and its rivals face a potentially-greater threat in China from a pricing investigation announced this month by China's National Development and Reform Commission, the top economic-planning agency, Mr Clark said.

    "There have been suggestions that this could result in large price cuts for those products that are available more cheaply in reference countries abroad," he added.

    Four senior Glaxo executives - all Chinese nationals - have been detained as part of the investigation.

    Enforcement measures have yet to be applied to expatriate staff. Mr Mark Reilly, the head of Glaxo's China unit, left the country last month after his colleagues were detained.