GlaxoSmithKline (GSK) announced that the company’s Chinese subsidiary, Glaxo China Investment Co. Ltd has been found guilty of bribing non-government personnel by the Changsha Intermediate People’s Court in Hunan Province, China. The court levied a fine of £297 million (approximately $484 million).
The court, as per Chinese laws, found that Glaxo had offered money and property to non-government personnel in order to obtain improper commercial gains. We remind investors that the investigations were initiated by China’s Ministry of Public Security in Jun 2013.
Our Take
The fine of £297 million levied by the Chinese government represents more than 5% of Glaxo’s second-quarter revenues. We believe this will have a negative impact on Glaxo’s already dwindling top line. Glaxo intends to pay the fine from its existing funds.
Meanwhile, the company is taking a number of steps to address the issue including introducing changes in the incentive program for its sales force – separating sales targets from compensation and reducing and changing engagement activities with health care professionals significantly.
The company has also expanded processes for review and monitoring of invoicing and payments. Additional details related to the cost and charges related to restructuring will be announced along with the third quarter 2014 earnings update scheduled on Oct 22.
Glaxo carries a Zacks Rank #5 (Strong Sell). Some better-ranked stocks in the health care sector include Gilead Sciences Inc. (GILD), Johnson & Johnson (JNJ) and Amgen Inc. (AMGN). While Gilead is a Zacks Rank #1 (Strong Buy) stock, Amgen and Johnson & Johnson carry a Zacks Rank #2 (Buy).
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