Glaxo’s China Sales Plunge 61% After Corruption Probe

GlaxoSmithKline Plc’s third-quarter sales of pharmaceuticals and vaccines in China fell 61 percent after an anti-corruption probe began there in July, and the drugmaker gave no outlook on how long the downturn would last.

Revenue from consumer health-care products in China fell 29 percent, the London-based company said today in a statement. Total sales rose 1 percent to 6.51 billion pounds ($10.5 billion), missing analysts’ average estimate of 6.64 billion pounds. U.S. sales also fell short of analysts’ predictions.

Glaxo’s woes in China are benefiting rival drugmakers. A “dramatic decline” in Glaxo’s Seretide lung drug and Flixonase nasal spray in the country led to a rapid acceleration in sales of AstraZeneca Plc’s Symbicort inhaler, Barclays Plc analysts said last week. Seretide sales in China fell 56 percent in the quarter, and revenue from hepatitis B drugs Zeffix and Hepsera dropped 73 percent and 76 percent, respectively.

“We very clearly recognize there is a profound need to earn the trust of the Chinese people again, and we will take every action to do so,” Chief Executive Officer Andrew Witty said in a media conference call today. “It is still too early for us to quantify the longer-term impact of the investigation on our performance in China.”

Bribery Allegations

Allegations by China’s government that Glaxo bribed hospitals, doctors and officials prompted Witty to dispatch his head of emerging markets to China to oversee the company’s response.

Glaxo shares fell 1.9 percent, the biggest decline in six weeks, to 1,570.50 pence at the close of trading in London. Before today, the shares had returned 24 percent this year, compared with a 21 percent return in the Bloomberg Europe Pharmaceutical Index. The stock has risen as Glaxo has won approval to sell four new medicines this year.

China accounts for slightly less than 3.5 percent of Glaxo’s global pharmaceutical revenue and is less profitable than its Western businesses, though the world’s most populous nation presents significant growth opportunities, the Barclays analysts said.

“China is a critically important country of the future,” Witty said on the call.

Rivals’ Revenue

The sales drop in China was more severe in July and August than in September, Witty told analysts on a separate call.

Novartis AG, Europe’s biggest drugmaker by sales, said this week that sales in China rose 18 percent in the quarter, while Eli Lilly & Co. today said sales there increased 11 percent.

Following the China allegations, Glaxo may alter its incentive compensation program for sales representatives to match changes it made in the U.S., Witty said. Glaxo made the changes just before agreeing to pay $3 billion to resolve U.S. criminal and civil probes into whether it marketed drugs for unapproved uses and other matters.

“Our customers are telling us it was the right call,” Witty said. “I’ve got no doubt we will look to export some of the lessons learned from that to other parts of the world.”

While the majority of the drop in sales in China stemmed from the investigation, which drove sales to competitors with similar products, part of the decline also came from an expected slowdown in the vaccines business, Witty said.

Long Shadow

“China continues to cast a pall over the company’s emerging markets operations and could have long-standing effects in the country,” Timothy Anderson, an analyst at Sanford C. Bernstein & Co. in New York, wrote in a report.

While it’s too early to make judgments on possible fines from the Chinese government, the company has sufficient legal provisions given the information gathered so far, Witty said.

Third-quarter earnings excluding some items were 28.9 pence a share. That compared with the average estimate of 27.2 pence from 17 analysts surveyed by Bloomberg. The results benefited from adjustments to the company’s retirement plan and lower spending on research and development.

The company maintained its forecast for the year as growth in other regions offset declining sales in China. In April, the company said it seeks to boost sales 1 percent this year and earnings per share by 3 percent to 4 percent.

Drugmakers including Novartis, Amgen Inc. and Johnson & Johnson raised their full-year forecasts this quarter. Roche Holding AG and Bristol-Myers Squibb Co. have maintained their 2013 forecasts.

Drug Approvals

Glaxo and partner Theravance Inc.’s lung drug Anoro last month won the backing of a U.S. advisory panel, which augurs regulatory approval by December. A nod for Anoro by the Food and Drug Administration would be Glaxo’s fifth this year. It’s unlikely any other major drugmaker globally will come close, according to Sam Fazeli, an analyst at Bloomberg Industries in London.

Breo and Anoro are of particular interest to investors as follow-up drugs to Seretide, which had about $8 billion in sales last year and may face generic competition following the expiration of the inhaler device’s patent in 2016. Seretide is marketed as Advair in the U.S. and had 1.2 billion pounds in sales in the third quarter, down 1 percent from a year earlier.

Glaxo is the U.K.’s biggest drugmaker. The second-biggest, AstraZeneca, reports third-quarter results Oct. 31.

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