GSK takes another sharp hit in China, sees H2 recovery


GlaxoSmithKline ($GSK) faced a dismal first quarter in China after pharmaceutical sales tumbled 28% after currency adjustments--a faster drop than the end of 2015. The company blamed its ongoing restructuring program in the country as well as costs pressures in tenders and reimbursement.

But on the April 27 earnings call, outgoing CEO Andrew Witty put a firmer timeline on stability and a turnaround for the second half of 2016 after analysts were surprised by the drop, coming after a fourth-quarter earnings call that suggested a reorganization was nearly completed.

"In terms of China, actually, the acceleration of what you're seeing in China, as Simon [Dingemans, GSK's chief financial officer] said, is partly to do with price cuts that we've taken," Witty said.

"But it's a lot to do with some disposals of products and businesses, which we decided were non-core and have been backed out. I fully expect China to come back to growth in the second half led by the respiratory business. So as we move through this year, I think we'll see the underlying improvements. We've seen good improvement on an underlying basis, but it's hard for you to see because we've done some disposals and you've got some price effect."

Regional tenders this year in China have so far showed sharp-elbow pricing at provincial levels, driven by the State Council's efforts to translate centralized buying power into lower costs through volumes.

Much of the focus for companies such as GSK is whether China this year updates its national reimbursement list for the first time since 2009--adding newer therapies at a volume that would boost earnings even at lower prices for products now mostly bought out-of-pocket.

China's national reimbursement list has remained the same since 2009. Speculation is growing however that a new list as early as this year could include cutting-edge chronic treatment therapies that the government would work hard to buy in volume at sharp discounts to current prices.

Witty said that overall, outside of China, the emerging market business sales gained 5% after currency adjustments in the first quarter. In the major Asian reimbursement market of Japan, he noted that sales fell 8% before currency adjustments--mainly linked to price cuts that take place once every two years.

- here's the earnings release