GlaxoSmithKline's China crisis has spooked shareholders

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China is a honeypot for drug and cosmetic firms. Chinese consumers, hurt by a succession of contamination scandals, have little trust in domestic operators.

For GlaxoSmithKline it should be a major profit centre but after its own China scandal, profits are in free-fall.

On Wednesday shareholders digested the latest decline and the pharmaceutical company was the FTSE 100's biggest faller.

The worries are two-fold. Can the company find a way back into one of the world's fastest developing healthcare markets? And what will be the implications of an investigation by the Serious Fraud Office into the drug maker's sales practices around the world?

Sir Andrew Witty, the chief executive, gave little away about the Chinese investigation into claims that GSK's sales reps paid doctors and health officials up to 3bn yuan (£284m) to push the firm's drugs. With the situation as it is, it was probably difficult for him to say much. What he could say and did say was that the company had changed the way it conducts its business, including "how we reward our sales representatives, and stopping payments to doctors to speak on our behalf or to attend medical congresses".

This statement was designed to allay fears about the SFO inquiry. But shareholders will be wary.

A company as large as GSK and with operations in so many countries where corruption is endemic will find it difficult to stay clean, no matter how hard it tries.

As Witty said: "In a company of our size operating in almost every country in the world there's always a small potential for some people to step outside procedure." According to the last Transparency International corruption perceptions index, which ranks countries according how corrupt people believe public organisations to be, many of GSK's markets are far more corrupt than China.

The People's Republic ranks at 80 out of 175 countries. The Philippines stands at 94, Mexico, home to 121 million people, is 106, while Russia and Pakistan are joint 127th.

GSK's reputation for producing the highest quality medicines puts it in a leading position across the developing world. And its profits on Wednesday from markets outside China showed it is doing well selling drugs to counter everything from heart disease to asthma.

But its travails underline the perils to any British company of entering high-growth export markets, which reside mostly in the developing world. When George Osborne set a target of £1tn in exports for UK companies by 2020, it should have carried a health warning.

Powered by Guardian.co.ukThis article was written by Phillip Inman, for The Guardian on Wednesday 23rd July 2014 20.24 Europe/London

guardian.co.uk © Guardian News and Media Limited 2010

 

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