Bribery scandal slashes GlaxoSmithKline's Chinese drug sales

By Ben Hirschler

LONDON (Reuters) - GlaxoSmithKline's drug sales in China slumped 61 percent in the third quarter, hit by a bribery scandal that has damaged its ability to market products in the country and pushed some sales into the hands of rivals.

Chief Executive Andrew Witty said GSK's business in China had suffered most where other drug options were available - as is the case with its top-selling lung medicine Advair, for which AstraZeneca's Symbicort is an alternative treatment.

The fall in Chinese sales was steeper than many analysts had expected and Witty told reporters it was too early to say when business might recover. But he stressed there was "absolutely no question" of GSK pulling out of China.

"We are totally committed to China," he said in a conference call on Wednesday.

Although Britain's biggest drugmaker generates less than 4 percent of its sales in China, it sees it a vital market for the future and has some 7,000 staff in the country, as well as five factories and a research centre.

Worldwide, GSK's sales were flat at 6.51 billion pounds ($10.6 billion) in the quarter, generating core earnings per share (EPS) of 28.9 pence, 10 percent higher than a year ago.

Analysts, on average, had forecast sales of 6.65 billion pounds and core EPS, which excludes certain items, of 27.2p, according to Thomson Reuters.

The higher-than-expected earnings number reflected lower costs, including reductions in spending on research and development (R&D) as several expensive late-stage clinical trials reached a conclusion. Witty said the trend of lower R&D costs was likely to continue into 2014.

GSK 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.

TARNISHED REPUTATION

GSK's reputation has been tarnished and its management team in China left in disarray by Chinese police allegations in July that it funneled up to 3 billion yuan ($490 million) to travel agencies to facilitate bribes to doctors and officials.

Industry insiders and analysts had been expecting that the police probe - one of Beijing's biggest into a foreign company - would dent sales significantly in the three months to September.

Other multinational drug companies are also being investigated but GSK has suffered the most damage from the scandal and many Chinese doctors have shunned its sales representatives.

Swiss rivals Roche and Novartis, by contrast, both saw continued growth in their Chinese drug sales in the third quarter.

Although China accounted for only 3.6 percent of GSK's global drug sales last year, the company has been investing heavily in the country. Before the scandal, GSK's China sales rose 14 percent year-on-year in the three months to end-June.

Emerging markets are an important plank of Witty's growth strategy as he grapples with slower uptake of GSK's products in the developed world.

GSK has recently seen some encouraging progress with its pipeline of new drugs - including approvals this year for new treatments for lung disease, cancer and HIV - but austerity pressures in Europe remain a drag on sales and profits.

(Editing by Keith Weir)