GlaxoSmithKline sees "some impact" from China probe; Q2 sales rise 2 percent

GlaxoSmithKline CEO Andrew Witty said Wednesday alongside the company's second-quarter financial results that the drugmaker is "likely to see some impact to our performance in China as a result of the current investigation" into alleged bribery in the country, but that "it is too early to quantify the extent of this." In his first public comments since the crisis broke, the CEO said that "to see these allegations made about people working for [GlaxoSmithKline] is shameful," and added "we are absolutely committed to rooting out corruption and…to getting to the bottom of what's happened here."

Witty declined to discuss specifics of the investigation, such as the current status of previously detained employees, including the company's chief finance officer for China Steve Nechelput, or whether GlaxoSmithKline or its staff could face criminal charges. The executive said GlaxoSmithKline has "reached out to various regulators on both sides of the Atlantic to open up channels" of communication, and noted the drugmaker plans to commission an "independent review into what happened," in order to "learn from this and make changes." Earlier this week, the company acknowledged that some employees may have violated Chinese law, and indicated plans to change its business model to reduce the cost of medicines in the country. Witty said this could include adopting more tiered pricing of medicines in China.

Edison Investment Research analyst Mick Cooper remarked that GlaxoSmithKline'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." With sales of approximately 1 billion pounds ($1.5 billion) in China last year, the country currently accounts for about 3.5 percent of the drugmaker's revenue, according to Mark Clark of Deutsche Bank. Still, Citigroup analyst Andrew Baum said that while the bribery allegations raise questions about GlaxoSmithKline's internal compliance procedures, he predicted the financial impact would probably be limited. Earlier this week, the company announced plans to move forward with a joint venture in China focused on vaccines.

With regard to second-quarter financial results, profit attributable to shareholders fell 16 percent to 1.1 billion pounds ($1.6 billion), falling short of analyst expectations of 1.3 billion pounds ($2 billion). However, GlaxoSmithKline posted a 2-percent increase in global sales to 6.6 billion pounds ($10.1 billion), in line with analyst predictions, with sales of prescription drugs rising by the same percentage to 4.5 billion pounds ($6.9 billion). Overall US sales were up 5 percent to 2.2 billion pounds ($3.4 billion), including a 5-percent rise in combined prescription drug and vaccine revenue to 1.8 billion pounds ($2.8 billion). Conversely, European sales fell 1 percent to 1.9 billion pounds ($2.9 billion), and prescription drug and vaccine sales for the region were flat at 1.3 billion pounds ($2 billion). Sales in emerging markets and Asia Pacific were up 3 percent to 1.7 billion pounds ($2.6 billion), including a 2-percent uptick in prescription drug and vaccine sales in the region to 1.2 billion pounds ($1.8 billion).

For the quarter, global revenue from respiratory pharmaceutical products increased 4 percent to 1.9 billion pounds ($2.9 billion), with Seretide/Advair sales gaining 5 percent to 1.4 billion pounds ($2.2 billion), and Flixotide/Flovent up by the same percentage to 202 million pounds ($310 million). The cardiovascular and urogenital division recorded a 2-percent rise in quarterly sales to 594 million pounds ($909 million), with revenue from Avodart improving by 12 percent year-over-year to 221 million pounds ($340 million), which GlaxoSmithKline attributed to strong contributions from the combination product Duodart/Jalyn in Europe, as well as in emerging markets and Asia Pacific.

Oncology and emesis drugs posted a 17-percent gain in quarterly sales to 233 million pounds ($357 million), while pharmaceutical products for the central nervous system dropped 15 percent to 373 million pounds ($571 million). Revenue from Viiv Healthcare was down 4 percent to 339 million pounds ($519 million), as Epzicom and Selzentry sales were offset by increased competition to older products. Quarterly sales of vaccines were flat year-over-year at 786 million pounds ($1.2 billion). The company said division sales were helped by Infanrix/Pediarix in the US, where revenue for the product was up 31 percent to 72 million pounds ($110 million) due to a competitor supply shortage. Meanwhile, total Cervarix revenue for the quarter decreased by 8 percent to 46 million pounds ($71 million).

Looking ahead, GlaxoSmithKline reiterated its 2013 projections for the year of sales growth of about 1 percent and earnings per share in the range of 3 percent to 4 percent.

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