GSK’s China Woes Continue; Posts 61% 3Q Sales Plunge
By Shannon Ellis
SHANGHAI – In the wake of a high-profile corruption scandal, Glaxosmithkline plc’s sales in China plunged in the third quarter.
The company announced earnings Oct. 23, and many in China were not surprised to learn that revenues in the country dropped a startling 61 percent.
Those results confirm long held expectations of lower revenues after a corruption scandal that has scared off some customers. Reports suggest GSK salespeople are not visiting hospitals that are, in turn, scared to receive them.
The chilly reception also extended to the R&D Based Pharmaceutical Association Committee (RDPAC), the multinational corporation (MNC) pharma association. Speaking to BioWorld Today, RDPAC confirmed that GSK has voluntarily withdrawn its membership. Although a spokesperson declined to discuss the details of the withdrawal, RDPAC was in an awkward position as GSK may have violated several components of its code of ethics.
Nevertheless, GSK CEO Andrew Witty painted a generally positive picture of the company’s global results during a call to discuss third quarter earnings Wednesday.
“(Global) sales grew 1 percent despite the impact of a significant decline in China sales and the timing of various vaccine tender shipments,” Witty said. “This was a resilient performance and is being driven by contributions across the group.”
GSK does not break out China from its Emerging Market and Asia Pacific (EMAP) numbers but past annual reports suggest China accounts for no more than 4 percent of global sales.
Witty noted that “operations in China were clearly disrupted.”
Both pharma and vaccine sales generally rose across the globe, up 2 percent in the U.S. and 5 percent in Europe. Take China out of the equation, said Witty, and Asia Pacific sales rose 5 percent.
The company also reported core earnings per share (EPS) of 28.9 pence (US48 cents), a 10 percent increase from last year. Other bright spots globally included a 4 percent bump in consumer health care and four drug approvals, including Tivicay (dolutegravir) for HIV; the FluLaval Q-IV vaccine for flu; Tafinlar (dabrafenib mesylate) for metastatic melanoma; and Relvar Ellipta (vilanterol/umeclidinium bromide) for asthma.
Witty sought to reassure investors that the company fully intends to continue pursuing its China strategy.
“We remain fully committed to supplying our products to patients in the country,” he said. “At this stage, it is still too early for us to quantify the longer-term impact of the investigation to our performance in China. The investigation is ongoing and is complex and detailed. We continue to fully cooperate with the authorities and to respect the process of the investigation.”
GSK is one of the larger pharmaceutical multinationals in China with 7,000 staff, five factories and an R&D center. The company sells 29 prescription medications, three vaccines and nine over-the-counter (OTC) drugs in China.
The products in the more competitive sectors were hit hardest, but the drop also affected drugs that are considered standard of care.
Vaccine sales dropped following changes to the country’s pharmacopoeia, which preceded the scandal. Witty credited a chunk of the decline in revenues, a full 15 percent, as having to do with vaccines and nothing to do with the scandal.
“[T]here is clearly a de-stocking effect,” he said. “We can’t tell you really what (the problem) truly is.”
“Data doesn’t exist in the China in the same way that it exists in the U.S. to be able to call out inventories, and it is clear there has been a de-stocking effect,” he said. “We can only really get to the bottom of what that looks like over the next six to eight weeks. I think where what we see through September, October, November maybe even December really will start to give us the proper trend of what is going on.”
Revenues were hardest hit during the initial months of the scandal that broke out in July and the pressure appears to have eased in September. (See BioWorld Today, July 23, 2013, and Aug. 30, 2013.)
It is still unclear what the impact of the investigation will be on GSK’s China operations. The company has continued to communicate with authorities in that country and in the U.S. The potential remains for the company to have to deal with breaches of the U.S. Foreign Corrupt Practices Act. Significant fines could prove to be another hit to the company’s bottom line.
GSK has been made into the poster child for wayward MNC behavior in China. A raft of companies have had their names publicly tarnished in the Chinese media, from baby formula producers to Starbucks, for a variety of misdemeanors around what is perceived to be unfair or illegal practices.
The sales practices of the pharmaceutical industry have come under particular scrutiny as whistleblowers have come out of the woodwork to make claims of impropriety. GSK competitors such as Roche AG and Novartis AG, have managed to continue to grow their revenues, although at a slower pace. (See BioWorld Today, Sept. 23, 2013.)
The corruption allegations against GSK remain the most serious. The company is under formal criminal investigation by the Public Security Bureau, the Chinese police, and it has been reported two dozen employees, all Chinese citizens, have been detained.
Authorities are investigating some ¥3 billion (US$490 million) worth of possible bribes funneled through travel agencies to doctors and officials.
“The activities described by the authorities are very serious and totally unacceptable,” Witty reiterated during the call. “They are contrary to our values and everything I believe in. We very clearly recognized there is a profound need to earn the trust of the Chinese people again.” n
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