GSK: in need of a Chinese remedy

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Scandals are, by nature, vague and confusing things. Are things as bad as they look? How long until the fog clears? Since news of bribery allegations in China emerged in mid July, GlaxoSmithKline shares have fallen 4 per cent. GSK’s first-half results presentation on Wednesday gave chief executive Andrew Witty a chance to provide clarity.

This was a tricky job – and one at which Mr Witty mostly failed. There is no news yet on what sanctions GSK could be facing. Mr Witty says the investigation is at an early stage, and is very keen to point the finger at individuals who broke GSK’s rules. He made noises about rooting out these wrongdoers and about his commitment to China. Well he might. With only 4 per cent of revenues, China is hardly GSK’s biggest market. But its 14 per cent sales growth gives it potential other regions cannot match.

At the same time, however, Mr Witty talked about changes to the business model in China, gesturing vaguely at pricing and marketing. That suggests the issue is broader than a couple of bad eggs. If wrongdoing by individuals is proved, that would also be an indictment of the way GSK hires and monitors its employees. The company will have to consider a real overhaul.

The worry is that whatever form GSK’s business in China takes in the future, it may not be very profitable. Other consumer goods companies have found that Chinese growth comes with low margins. SABMiller’s margins in China are less than half of the group average. Tesco is limiting the new capital it spends in China until it has some clarity on the business model.

Outside China, GSK’s results were in line with expectations, and there have been some pleasing approvals of new drugs. But the shares barely moved. Investors will just have to get used to the confusing situation in China. It is not going away.

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