GlaxoSmithKline bribery probe takes 61% bite out of China sales

One big question about GlaxoSmithKline's ($GSK) third quarter now has a definite answer: The Chinese bribery probe took a bite out of sales in the country--and a bigger bite than analysts expected. Revenue there was down 61% for the period, as doctors and salespeople alike were spooked into staying behind closed doors.

Of course, GSK's sales in China represent a small share of its overall sales--only 4%--but the quick slide managed to drag down the entire emerging markets business. China's decline, combined with a vaccines slowdown in emerging markets, pushed that region's sales down by 9%. So, growth in the U.S. (2%), Europe (5%) and Japan (2%) only made up enough ground to barely push pharma and vaccines sales into positive territory. Overall, GSK sales were up 1%, at £6.51 billion, or $10.09 billion.

Naturally, CEO Andrew Witty emphasized the positive: U.S. pharma sales would have grown by 5% if wholesalers and retailers hadn't focused on de-stocking. The European growth shows that Glaxo's restructuring there--expected to yield at least £1 billion in annual savings--was on-target. Excluding the China business, sales in emerging markets and the Asia-Pacific region grew 5%.

Plus, Witty said in a statement, look at the new drugs launched so far this year--melanoma treatments Tafinlar and Mekinist; HIV fighter Tivicay; and respiratory therapy Breo Ellipta--and those on their way.

CFO Simon Dingemans added some numbers to the mix: Without the China hit, EMAP sales would have grown 2%. Cost-savings programs cut spending by another £200 million during the quarter, and changes in retiree medical benefits saved another £267 million. Add it all together, and profits were up, with earnings per share at 28.9 pence, a 16% increase. To sweeten the news for investors further, GSK boosted its dividend by 6% to 19 pence per share.

The fiasco in China has played out quite publicly, with employees rounded up and detained, and some paraded on state television. GSK executives have been asked to remain in the country while cooperating with the investigation, and emerging markets chief Abbas Hussain jetted in to apologize to officials and offer compensatory price cuts. Physicians and hospitals have actually barred pharma reps, including those from GSK, as the corruption probe unfolds.

Would all that woe scare Glaxo out of China altogether? British media trotted out the idea. But today, Witty put the kibosh on that. The company said it can't yet quantify the long-term effects of the bribery probe. But during the earnings call today, Witty indicated that the pain in China was most severe in July and August, with an easing up in September. "I don't think you can call that a trend yet," he acknowledged, but implied that it might be the leading edge of one. Just to remove any doubts, he said, "We are totally committed to China." How committed China is to GSK remains to be seen. 

- see the press release from GSK (PDF)

Special Reports: Top 10 Drugmakers in Emerging Markets - GSK | Top Pharma Companies by 2012 Revenues - GSK