October 23, 2013 5:08 pm

GlaxoSmithKline: China conundrum

Hit from bribery probe is a distraction from progress elsewhere

GlaxoSmithKline’s Chinese conundrum is turning into quite a, well, conundrum. The pharma group said on Wednesday that its sales in this key market had tumbled 60 per cent in the third quarter as a result of the bribery investigation that has disrupted its operations there. GSK is understandably cautious in its assessment of the problem. But the scale of the short-term hit means investors will need reassurance that the long-term consequences will be less severe.

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China accounted for 15 per cent of GSK’s total sales of pharmaceuticals and vaccines in emerging markets in 2012. In the third quarter of 2013, that proportion had halved. Emerging-market sales accounted for a fifth of its total pharma and vaccine sales in the three months to September. Excluding China, GSK’s pharma and vaccine sales in emerging markets were up 5 per cent. Other markets can pick up some of the shortfall but will not be able to carry it for ever.

China, in truth, is a distraction from progress in the rest of GSK’s operations. The group’s operating margin continues to rise – it was 31.6 per cent in the quarter – and research and development costs are falling. GSK is also slimming. The disposals of the Lucozade and Ribena brands and its anticoagulants business in the quarter netted a combined £2bn. Chief executive Sir Andrew Witty says GSK is more a seller than a buyer of assets. It is also generating substantial free cash flow, helping to fund a 6 per cent rise in the dividend and a £1bn share repurchase in the quarter.

Shares of GSK are up 18 per cent this year, against 10 per cent for AstraZeneca and 50 per cent for serial outperformer Bristol-Myers Squibb. That still leaves it at a discount to its Swiss and US rivals. The China issue has been a drag on its shares. All the more reason to try to put the matter behind it.

Email the Lex team in confidence at lex@ft.com

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