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Why Chinese Bribery Allegations Do Not Put Me Off GlaxoSmithKline Plc

In recent weeks, there have been serious allegations surrounding the alleged bribery of Chinese doctors by pharmaceutical company GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US). Although shares have not been particularly volatile and have not fallen much, the allegations are not to be taken too lightly as China represents a major growth market for the company.

Of course, GlaxoSmithKline initially denied any wrongdoing; stating that it had conducted a thorough internal investigation and found that it had acted within the law. However, since the initial statement the company has admitted that “certain senior executives of GSK China who know our systems well appear to have acted outside of our processes and controls which breaches Chinese law”.

Indeed, it appears as though the company is attempting to blame the alleged misdemeanours on rogue executives as opposed to company policy. Either way, four GlaxoSmithKline executives have been detained, with a further 18 staff also detained in the last day or so.

Of course, the cynic in me thinks that the allegations could be a means of the Chinese government obtaining lower drug prices for its population. I’m not saying they are ‘inventing’ the allegations but GlaxoSmithKline’s second statement could provide an indication as to the overall objective of the Chinese government: “savings made as a result of proposed changes to our operational model will be passed on in the form of price reductions, ensuring our medicines are more affordable to Chinese patients”.

Despite the adverse news flow described above, I still think GlaxoSmithKline is well worth adding to your portfolio. For starters, any wrongdoing is unlikely to be a strategy of the company and is more likely rogue executives, as GlaxoSmithKline seems to be indicating. Furthermore, it would not be a major surprise to learn that executives of other pharmaceutical companies have committed similar wrongdoings, meaning GlaxoSmithKline is unlikely to feel the full force of the Chinese government’s wrath.

In addition, shares yield an impressive 4.4% and trade on a discount to their sector, with shares currently having a price-to-earnings (P/E) ratio of 14.9 versus 16.7 for the healthcare sector.

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> Peter owns shares in GlaxoSmithKline.