Glaxo Looking into Misconduct Charges - Analyst Blog

GlaxoSmithKline GSK recently responded to investigations and charges of misconduct in Jordan and Lebanon. Glaxo clarified that it is taking a number of steps to address the issue. The company disclosed that it is looking into allegations brought against some of its employees in these countries. For this, the company is using both internal and external teams. However, the investigations are not over yet.

We note that this is not a one-off misconduct charge surfacing at Glaxo. In 2013, there were a number of breaches in Glaxo's sales and marketing policies (161 violations), most of which resulted in written warnings (113) and even some dismissals (48).

Glaxo is also facing investigations and charges of fraudulent behavior and ethical misconduct leveled by Chinese government authorities. The investigation is still ongoing; it is likely that a number of employees working at Glaxo were engaged in fraudulent practices.

Our Take

We note that the Emerging Markets and Asia Pacific (EMAP) market – of which China and the Middle East/Africa are a part – contributed more than 25% to Glaxo's revenues in 2013.

We remind investors that Pharmaceuticals and Vaccines sales were adversely affected (by 4%) in 2013 due to the ongoing investigation in China.  Revenues generated in China were down 18% in 2013. We are thus concerned about a potential decline in Glaxo's revenues in the Middle East/Africa region. Pharmaceuticals sales in the region were up 5% in 2013 to £1,018 million. We believe that any strict action enforced against Glaxo will impact the company's top line in the long term.

Glaxo currently holds a Zacks Rank #3 (Hold). Some better-ranked stocks in the healthcare sector include AbbVie Inc. ABBV, Allergan Inc. AGN and Johnson & Johnson JNJ. All three sport a Zacks Rank #2 (Buy).