For GlaxoSmithKline’s (LSE: GSK) (NYSE: GSK.US) shareholders, the wait is finally over. It was announced today that the company has been fined £300m after being found guilty of bribery by a Chinese court.
In some respects this is great news. Indeed, although the fine is the biggest such penalty levied on foreign a company in China, it removes much uncertainty, bringing to an end 15 months of speculation.
Alongside the fine, the former head of Glaxo’s China business, Mark Reilly pleaded guilty to bribery-related charges and was given a three-year suspended sentence. He will be deported back to the UK.
Not over yet
Still, despite this ruling from China, Glaxo could face further action at a corporate level from US and UK authorities.
UK and US authorities have the power to punish the company for overseas corruption and investigations are under way in both countries. The guilty verdict from China will definitely have a negative outcome on the investigations by agencies in the West.
However, for a company like Glaxo, which reported pre-tax profits of £6.6bn last year, the company should have no trouble paying fines resulting from guilty verdicts.
Changing habits
The Chinese bribery scandal has been a wake-up call for Glaxo. The company is now working hard to change the way that it does business, formally reforming its incentive programme for marketing employees. Now, sales staff are no longer paid according to sales targets hit and the company has stopped paying doctors to speak on its behalf at medical conferences.
The group is also continuing its work within China, supporting the government’s healthcare reform agenda and the company’s Chinese business is showing some signs of a return to normality. In particular, Chinese sales declines are already slowing after bribery revelations, Chinese revenue plunged 61% during the third quarter of 2013. This decline has since moderated, with sales only declining by around 20% during the first half of 2014.
Plenty to look forward to
Away from the Chinese issues, Glaxo is in rude health and the company has, according to City analysts, one of the best pipelines of new treatments underdevelopment within its sector. Specifically, Glaxo currently has 40 new drugs under development, including a vaccine for the deadly Ebola virus currently sweeping West Africa.
Additionally, Glaxo has built up a world leading consumer healthcare company. The group signed a deal with peer Novartis earlier this year, which will see Glaxo and Novartis create a new Consumer Healthcare business, with 2013 pro forma revenues of £6.5 billion. Glaxo will own the lion’s share of this business, with a 63.5% equity interest.
So, Glaxo is moving forward, and with the Chinese bribery issue behind it, the company can get on with developing its treatment portfolio and consumer healthcare arm.
A great pick
Due to its position in the world healthcare market, Glaxo is a defensive by nature, which makes the company the perfect long term ‘buy and forget’ share. And with a dividend yield of 5.4% at current levels, it’s hard to ignore the company.
