GSK says China poised to rebound as reorganization gathers pace

GlaxoSmithKline ($GSK) saw another sharp drop in China sales of established pharmaceuticals, but CEO Andrew Witty said that was all part-and-parcel of reshaping the business including sales of products in the Middle Kingdom and that 2016 should start to see a turnaround, along with emerging markets generally.

Established pharmaceutical sales in China fell 21% to £249 million ($361 million) in the fourth quarter, with overall sales down 17% adjusted for currency.

"Within international sales and emerging markets, we're down 5% in large part due to the continued impact on our China business of the reshaping of that business and significantly greater pressure within the marketplace," Witty said on the Feb. 3 earnings call.

But Witty took great pains to describe a company involved in a massive transition of business priorities across all markets that includes a halt since the start of the year on all speaker fees for healthcare practitioners in favor of an "industrial level" field force of medical professionals on staff.

"We've got a very balanced geographic exposure for the organization," Witty said. 

  GSK CEO Andrew Witty

"We believe, despite much commentary, that we have really established some significant leadership positions in terms of our new commercial model."

Still, Graham Parry, an analyst with Bank of America Merrill Lynch, took the first question to put Witty on the spot about mixing pharma and over-the-counter sales efforts and why China continued to slump in the fourth quarter.

Witty was ready for the China question.

"In China, we've been focusing our business as we look to rebuild it. But that has involved some divestments. That's what's really affecting the growth rate during the year plus some price cuts that we've taken during the year, which certainly the leading indicators would tell us that, that is going to put us in a much better position to go forward to grow," Witty said.

"I think nothing super dramatic on China but there is a combination of price reductions. Let's call them one-off price reductions and some one-off divestment impacts on that top line. Other than that I think the underlying signals we're getting are encouraging. I expect to come back growth."

But Witty left it to Simon Dingemans, chief financial officer, to explain that repositioning GSK was akin to turning a battleship under fire as rapid changes lead to supply constraints for some key products being pushed harder.

"Capacity constraints also impacted a number of products more broadly across the emerging market space," Dingemans said. "Economic conditions also remained challenging but we remain very focused on executing against these."

That was a theme Witty returned to, explaining as he has before that sales hinge on more than a product.

"I'll pick one example, Augmentin, which has, I've said to you before, we now sell something like I think three or four times the volume of Augmentin we sold when the product was at the peak of its patent-protected sales," Witty said.

"As a consequence of that, we've had to expand our capacity and not shockingly new revelation, capacity doesn't always come on stream exactly when you need it. During 2015, we had some capacity constraints in products like Augmentin. Capacity has now opened up. We'd expect that capacity to be freed up this year. We'd expect Augmentin to move forward this year, similarly in one or two other lines."

- here's the release