Bribery scandal slashes GlaxoSmithKline's Chinese drug sales

By Ben Hirschler

LONDON (Reuters) - GlaxoSmithKline's (LSE:GSK) drug sales in China slumped 61 percent in the third quarter, hit by a bribery scandal that damaged its ability to market products in the country and pushed some sales into the hands of rivals.

Chief Executive Andrew Witty said GSK's China business had suffered most where other drug options were available - as with its top-selling lung medicine Advair/Seretide, for which AstraZeneca's (LSE:AZN) Symbicort is an alternative treatment.

The fall in Chinese sales, described by Deutsche Bank analysts as "dire", was steeper than investors expected and Witty told reporters it was too early to say when business might recover from the Chinese-government probe into allegations that GSK had bribed doctors to boost drug sales.

GSK could also end up facing hefty fines, although Witty said he believed existing legal provisions were sufficient - and he stressed there was "absolutely no question" of GSK pulling out of China.

"We are totally committed to China," he told reporters in a conference call on Wednesday. "This is a very important business to GSK. China is a critically important country of the future."

Although Britain's biggest drugmaker generates less than 4 percent of its sales in China, it has invested heavily in the country, where it employs 7,000 staff and has five factories and a research centre.

Worldwide, GSK's sales were flat at 6.51 billion pounds ($10.6 billion) in the quarter, generating core earnings per share (EPS) of 28.9 pence, 10 percent higher than a year ago.

Analysts, on average, had forecast sales of 6.65 billion pounds and core EPS, which excludes certain items, of 27.2p, according to Thomson Reuters.

The higher-than-expected earnings number reflected lower costs, including reductions in spending on research and development (R&D) as several expensive late-stage clinical trials reached a conclusion. Witty said the trend of lower R&D costs was likely to continue into 2014.

GSK also made savings on post-retirement healthcare benefits for its staff.

The sales shortfall, however, knocked the shares 2 percent lower by 1330 GMT in a flat European sector for healthcare stocks (.SXDP).

The company reiterated that it expected sales growth for the year to be around 1 percent in local currency terms, with EPS rising by between 3 and 4 percent.

TARNISHED REPUTATION

GSK's reputation has been tarnished and its management team in China left in disarray by Chinese police allegations in July that it funnelled up to 3 billion yuan ($490 million) to travel agencies to facilitate bribes to doctors and officials.

Industry insiders and analysts had been expecting that the police probe - one of Beijing's biggest into a foreign company - would dent sales significantly in the three months to September, perhaps by around 30 percent.

In the event, Chinese sales of pharmaceuticals and vaccines were down 61 percent in the quarter to 77 million pounds.

Other multinational drug companies are also being investigated but GSK has suffered the most damage from the scandal as many Chinese doctors have shunned its sales representatives.

Swiss rivals Roche (VTX:ROG) and Novartis (VTX:NOVN), by contrast, both saw continued growth in their Chinese drug sales in the third quarter.

Although China accounted for only 3.6 percent of GSK's global drug sales last year, the company has been investing heavily in the country. Before the scandal, GSK's China sales rose 14 percent year-on-year in the three months to end-June.

Emerging markets are an important plank of Witty's growth strategy as he grapples with slower uptake of GSK's products in the developed world.

GSK has recently seen some encouraging progress with its pipeline of new drugs - including approvals this year for new treatments for lung disease, cancer and HIV - but austerity pressures in Europe remain a drag on sales and profits.

Traditionally, GSK has been particularly strong in respiratory medicine and analysts at Berenberg Bank said the commercial roll-out of its new lung drug Breo in the United States last week should reassure investors. ($1 = 6.0925 Chinese yuan) ($1 = 0.6168 British pounds)

(Editing by Keith Weir and Elaine Hardcastle)