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Glaxo warns China corruption scandal will hit business

A Chinese employee walks into a GlaxoSmithKline (GSK) office in Beijing, July 19, 2013. REUTERS/Jason Lee
A Chinese employee walks into a GlaxoSmithKline (GSK) office in Beijing, July 19, 2013. REUTERS/Jason Lee

By Ben Hirschler

LONDON (Reuters) - A "shameful" corruption scandal in China will inevitably impact GlaxoSmithKline's business, the British drugmaker's chief executive said on Wednesday, adding he was ready to go to Beijing "at the right moment."

In his first public comments since the crisis broke a fortnight ago, Andrew Witty said GSK would set up an independent review to investigate the "deeply disappointing" allegations.

GSK believes the alleged corruption involved senior Chinese staff working around its systems to potentially defraud the company as well as cheating the Chinese healthcare system, adding that head office had had no knowledge of the situation.

"The alleged activities are not what we expect of our people and are totally contrary to our values," Witty told reporters as he presented the company's second-quarter results.

"Clearly, we are likely to see some impact to our performance in China as a result of the current investigation, but it is too early to quantify the extent of this."

GSK's reputation has been damaged and its management team in China left in disarray by Chinese police allegations that it funneled up to 3 billion yuan ($489 million) to travel agencies to facilitate bribes to doctors and officials.

China's official news agency Xinhua suggested on Wednesday that more foreign and local pharmaceutical firms could soon be implicated in the corruption scandal sweeping the industry.

GSK has admitted that some Chinese executives appeared to have broken the law and says it plans to change its business model to lower the cost of medicines in the country.

Witty said this could include adopting more tiered pricing of medicines in China - an approach designed to make drugs more affordable in poorer countries. It is a model that GSK has used in other developing regions, including Africa.

Despite the problems, Witty stressed he remained committed to China and saw it as a key country for further investments.

China is an important growth market for GSK and other large drugmakers, which are relying on the middle classes in emerging markets to buy more of their products as sales in Western countries falter due to patent losses and government cutbacks.

GSK's sales in China, where it employs more than 7,000, rose 14 percent in the second quarter to 212 million pounds ($326 million) - 3.2 percent of the group total.

GSK supplies products such as vaccines in China, as well as drugs for lung disease and cancer.

Citigroup analyst Andrew Baum said the bribery allegations raised questions over GSK's internal compliance procedures but the financial impact was likely to be limited.

The bribery scandal suggests business in China is going to get tougher, especially if Beijing succeeds in driving down the premium prices enjoyed by Western firms.

There is also potential for regulators in the United States and Britain to prosecute GSK under bribery laws, although Witty said investigations appeared to be limited to China so far.

Asked whether he should lose his bonus in the light of a scandal, Witty said: "That is really a matter for the board to consider at the right time."

WORLDWIDE SALES UP 2 PERCENT

In the latest quarter, GSK's worldwide sales rose a modest 2 percent to 6.62 billion pounds, generating core earnings per share (EPS) up 1 percent at 26.3 pence.

That was marginally better than the market had expected, given that Britain's biggest drugmaker has been struggling to grow in recent quarters due to loss of patent protection on some of its medicines and falling prices in austerity-hit Europe.

Analysts, on average, had forecast sales of 6.60 billion pounds and core EPS, which excludes certain items, of 26.2p, according to Thomson Reuters.

The company reiterated that it expected sales growth for the year to be around 1 percent in local currency terms, with EPS rising by between 3 and 4 percent. It said there had been encouraging progress with its pipeline of new drugs but austerity pressures in Europe were likely to continue.

It also repeated that it planned to buy back between 1 billion and 2 billion pounds of shares in 2013.

GSK has been investing heavily in China in recent years and now has five factories and a research center in the country.

Ensuring compliance with global standards, however, has not been easy. Sources familiar with the matter have said GSK conducts up to 20 internal audits of its Chinese operations each year, many of which find problems.

The head of GSK's research center in China was sacked in June due to misrepresentation of data in a scientific study and two years earlier deficiencies were identified at the Shanghai facility, which GSK says have now been fixed.

(Additional reporting by Kate Kelland, editing by Jane Barrett and Jane Merriman)

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