China syndrome

Glaxo wrestles with its past

Investors keep taking hits on GlaxoSmithKline. The pharmaceutical group's stock price has fallen nearly 10 per cent in the last year on the back of weaker sales and bribery accusations in China. News of a criminal investigation in the United Kingdom knocked almost $2 billion of its market capitalisation on Wednesday morning.

The British Serious Fraud Office (SFO)'s investigation isn't entirely unexpected. Glaxo had been collaborating with the SFO since the China scandal erupted. The company has various lines of defence - despite what seems like a rash of similar accusations across its emerging markets business.

It argues there is no systemic problem and it has zero tolerance for illegal behaviour. If it can show any wrongdoing was the result of rogue individuals, the company may be safe. Failing that, prosecution isn't inevitable: Cooperation may result in a deferred prosecution agreement.

The risk is that the SFO has or may unearth new problems. The investigation relates to business practices in numerous jurisdictions, not only China, according to one person with knowledge of the matter.

The fallout is uncertain, too. The UK's Bribery Act that came into effect in 2011 is not retrospective, but it gives the SFO far greater power to pursue corporate wrongdoing in foreign jurisdictions, with the potential for unlimited fines. The SFO is itching for a scalp under the new rules.

Chinese bribes have been estimated at less than $500 million. Wednesday's loss in market value looks prudent, as long as Glaxo's emerging markets business, which brought in £1.5 billion last quarter, is not rotten to the core.

Still, the full impact of the China fallout is only emerging, and adds to other bad news, such as weaker-than-expected respiratory sales last quarter. Glaxo's China sales have fallen off a cliff since 2013 - and the rate of decline was still 20 per cent last quarter, despite GSK's attempts to get ahead of the problem.

Last year's revamp of its ethics policies bans payments to doctors globally, placing Glaxo at the vanguard of the pharma sector ethics. Yet the rules won't be in place till 2016, and the effects on sales are unclear. That will allow Glaxo to put its dark days behind it, eventually.