Glaxo CEO Commissions Independent Review on China Probe

GlaxoSmithKline Plc Chief Executive Officer Andrew Witty said the U.K. drugmaker commissioned an independent review to investigate the root cause of alleged fraudulent behavior among senior executives in China.

Law firm Ropes & Gray will conduct the review, which will begin within days, said Glaxo spokesman Simon Steel.

Allegations this month by the Chinese government that Glaxo bribed hospitals, doctors and health officials prompted Witty to dispatch his head of emerging markets to China to oversee the London-based company’s response. Some senior executives appear to have acted outside of Glaxo’s processes and controls to both defraud the company and the Chinese health-care system, Witty said today.

“To see these allegations made about people working for Glaxo is shameful,” he told reporters on a second-quarter earnings conference call in his first public statement since the investigation was disclosed. “We are absolutely committed to rooting out corruption and we are also absolutely committed to getting to the bottom of what’s happened here.”

Asked whether he would consider giving up his bonus this year, Witty said the company must first uncover the truth.

“Once we have understood that, then obviously those consequences need to be considered,” he said.

‘Limiting Damage’

Glaxo’s drug and vaccine sales in China rose 14 percent in the second quarter to 212 million pounds ($325 million), the company said in a statement. China accounts for slightly less than 3.5 percent of the company’s global pharmaceutical revenue and is less profitable than its Western businesses, according to Mark Clark, an analyst at Deutsche Bank AG in London. Glaxo had sales of about 1 billion pounds in China last year.

“Glaxo’s main focus will be on limiting the damage to its long-term prospects in China, which is set to be the largest pharmaceutical market in 2020,” Mick Cooper, an analyst at Edison Investment Research, said in a note to investors today.

The anti-corruption probe will probably hurt the drugmaker’s sales in China, Witty said in today’s statement, adding that it’s too early to say what the impact will be. Glaxo also will probably adopt a tiered pricing structure for the market, Witty said on the call.

While a fine and legal damages are expected, Glaxo may also give further price discounts as a means of goodwill and reparation, Fabian Wenner, a health-care analyst with Kepler Capital Markets in Zurich, said in a note.

Price Reductions

Glaxo rose 0.5 percent to close at 1,681 pence in London trading. The stock has gained about 29 percent this year, including reinvested dividends.

Glaxo is reviewing how it operates in China, according to Abbas Hussain, Glaxo’s head of emerging markets. “Savings made as a result of proposed changes to our operational model will be passed on in the form of price reductions, ensuring our medicines are more affordable to Chinese patients,” he said this week.

The probe “will slow down growth a bit in China, but it won’t irreparably damage the business there,” Alistair Campbell, an analyst at Berenberg Bank in London, who has a buy recommendation on Glaxo shares, said in a telephone interview. “Glaxo has a healthy portfolio of products. It’s also such a small percentage” of Glaxo’s total sales.

Detained Executives

China detained four senior Glaxo executives on suspicion of economic crimes, the Ministry of Public Security said July 15. Its finance chief in China, Steve Nechelput, has been unable to leave the country since the end of June because of the investigation, though he hasn’t been arrested or questioned, the company said last week. Mark Reilly, the head of Glaxo’s China pharmaceuticals business, returned to the U.K. on a planned business trip, according to the company.

Glaxo’s executives “violated China’s laws and damaged markets by engaging in bribery to raise drug prices, expand sales and reap inappropriate profits,” the Ministry of Public Security said in a statement posted on its website July 22.

Glaxo today reported second-quarter earnings excluding some items were 26.3 pence a share, compared with 26.1 pence a year earlier. That compared with average estimate of 26.3 pence from 14 analysts surveyed by Bloomberg. Sales rose 2 percent to 6.6 billion pounds, meeting the average analyst estimate.

Revenue from consumer health-care products in China continued to decline, mainly because of new shelving requirements for the Contac cold and flu treatment and mandatory price reductions for Fenbid, an over-the-counter pain medication, Glaxo said.

Sales of Seretide, the company’s top-selling lung medicine, were 1.36 billion pounds, with “strong growth in China” and other emerging markets, Glaxo said.

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