GSK Share Price: Chinese VP of Operations Confesses to Bribery

on Jul 16, 2013
Listen Tuesday July 16th: GlaxoSmithKline’s share price (LON:GSK) fell by almost 0.7 percent to 1,732.67p in morning trading today after a senior executive of the drug manufacturer confessed to bribery.

Liang Hong, the company’s 49-year-old vice president of operations in China, appeared on one of China Central Television’s (CCTV) most popular evening news programmes on Monday night and admitted that the “money we spent to run our business was too much.” According to The Telegraph, Hong spoke from what appeared to be a detention cell and looked “unshaven and dishevelled”.

“All of these costs [of our bribery] were included in the price of the drugs. The money we spent running the business accounted for about 20pc to 30pc of the drug price,” Hong admitted in front of millions of viewers. Gao Feng, the person in charge of leading the investigation into GlaxoSmithKline, said on Monday that the pharma group had funnelled more than 3 billion yuan (₤323 million) to doctors and health officials to persuade them to prescribe its drugs. Allegedly, GSK had used travel agencies as conduits to pass the bribes.

Glaxo has released a statement saying it was deeply “concerned and disappointed by these serious allegations of fraudulent behavior and ethical misconduct,” adding that “GSK has zero tolerance for any behaviour of this nature.” The company is fully cooperating with Chinese authorities in the investigation and has already stopped using the services of the travel agencies identified so far.

!m[Analysts Expect Small Settlement Fee and Limited Impact on Shares](/uploads/story/4020/thumbs/pic1_inline.jpg)
Despite the severity of the accusations, experts say that if found guilty GSK could incur a penalty equal to only a fraction of its sales in China, the world’s fastest-expanding major pharmaceutical market. “While being involved in criminal offenses and associated with illegal actions is clearly damaging for GSK’s reputation, I doubt that this will be of material impact for the company,” Fabian Wenner, a health-care analyst for Kepler Capital Markets, yesterday told Bloomberg in an interview. Wenner estimates that Glaxo would have to pay between $5 million and $10 million (₤3.3-₤6.6 million) to settle on a potential case. “I haven’t spoken to any investor who is concerned about this yet.”

According to Mark Clark, pharmaceutical analyst at Deutsche Bank, GSK is unlikely to lose market share in China because it has a strategically important portfolio of drugs and vaccines in the country. Furthermore, the world’s second biggest economy generates only three percent of western pharma giants’ earnings per share. Glaxo’s revenue in China last year contributed about 3.8 percent to the company’s total, chief financial officer Simon Dingemans said in May.
**GSK’s share price was 1,734.00p as of 11.07.2013, 10.37 BST.**