GSK’s Share Price Declines on Admittance of Possible Breach of Chinese Law

on Jul 22, 2013
Listen Monday July 22nd: GlaxoSmithKline (LON:GSK) admitted today that some of its executives in China appeared to have breached the law as part of a major bribery scandal. The British drugmaker also promised that it would lower the price of pharmaceuticals sold in the Asian country thanks to proposed changes to its operations. GSK’s share price declined by 0.45 percent to 1,707.35p in the morning trading session on the LSE.

“Certain senior executives of GSK China, who know our systems well, appear to have acted outside of our processes and controls which breaches Chinese law,” Abbas Hussain, GSK’s head of emerging markets, said in a statement.
Hussain has met with officials from the Ministry of Public Security and has promised to review GSK’s business model. “Savings made as a result of proposed changes to our operational model will be passed on in the form of price reductions, ensuring our medicines are more affordable to Chinese patients,” the executive, who was sent to China to handle the bribery scandal, said.

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Meanwhile Chinese police has urged GSK to cooperate with the ongoing bribery probe: “The GSK head office should face up to its duties and responsibilities, fulfill the commitments in its apology statement and fully cooperate with the investigation by China’s police.” An official has previously alleged that GSK staff transferred almost $500 million (₤327 million) in bribes using travel agencies and consultants. Chinese police have detained four top executives of GSK China and have prevented the firm’s British finance director from leaving the country.

According to The Guardian, GSK had briefed criminal investigators from the Serious Fraud Office (SFO) on its activities in China as chief executive Sir Andrew Witty was preparing to face a barrage of tough questions from shareholders.
!m[Pharma Giant to Lower Medicine Prices After Business Reorganisation](/uploads/story/4193/thumbs/pic1_inline.png)

The SFO has the power to investigate and prosecute corruption both domestically and abroad. However in some cases companies can be granted immunity from prosecution if they have been pro-active and cooperated fully with investigators. “We are keeping all regulators up to date as appropriate,” a spokesman for GSK commented.
GlaxoSmithKline has also hired big four auditor Ernst & Young to carry out an independent review of its business in China. The drugmaker declined to make any further comments ahead of the second-quarter results due to be released on July 24.

**Analysts on GSK**
Despite the bribery investigation, GSK’s shares have lost little ground over the past two weeks, reflecting the fact that China accounts for only three percent of sales.
Societe Generale reaffirmed its “buy” rating on GSK in a research note sent to investors on Thursday last week. The bank gave the shares a price target of 2,000p.
Six analysts have rated the stock with a “sell” rating, six have issued a “hold” rating and nine have given it a “buy” rating. GSK currently has an average rating of “hold” and a consensus price target of ₤1,714.71
**GSK’s share price was 1,705.65p as of 22.07.2013, 10.31 BST.**


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