2 Resounding Reasons To Sell GlaxoSmithKline plc

Royston Wild looks at why GlaxoSmithKline plc (LON: GSK) could be in danger of heavy weakness.

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In recent days I have looked at why I believe GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) appears set to enjoy a bright future.

But, of course, the world of investing is never a black and white business — it takes a variety of views to make a market, and the actual stock price is the only indisputable factor. With this in mind I have laid out the key factors which could, in fact, push GlaxoSmithKline’s share price to the downside.

Chinese corruption charges loom large

GlaxoSmithKline remains embroiled in an extensive bribery case in China, a situation which threatens to seriously undermine the firm’s revenue outlook in the key emerging market. Authorities there have accused the company of providing doctors with cash and other incentives to the tune of £320m, a situation which the firm has attributed to rogue operatives.

Although chief executive Sir Andrew Witty’s annual bonus surged from £900,000 during 2012 to almost £1.9m last year, the board’s subsequent statement that “the bonuses awarded for 2013 were lower than they otherwise might have been” shows the seriousness with which they are taking the situation in China.

As I have stated previously, I believe that GlaxoSmithKline’s suite of critical, market-leading products mean that the company’s long-term growth prospects in the China remain compelling.

But given the spate of bribery cases currently being investigated in China, including that of fellow FTSE 100 constituent Rolls-Royce, Beijing may be tempted to make an example of GlaxoSmithKline by doling out hefty penalties. Since the timing of any resolution remains anyone’s guess, the company’s sales in the country could continue to suffer for some time — Chinese pharmaceutical and vaccine revenues dropped 18% last year due to the ongoing impasse.

R&D remains hit and miss

GlaxoSmithKline’s heavy investment in R&D is paying off handsomely, an absolutely necessity given the loss of exclusivity amongst many of its critical drugs. The firm saw six major products receive approval last year, and completed five additional regulatory filings.

Most recently, the company announced in February that its Anoro and Incruse drugs had received the thumbs-up from the European Medicines Agency’s Committee for Medicinal Products for Human Use. A final decision on the products, used to battle chronic obstructive pulmonary disease, is anticipated from the European Commission during the second quarter.

However, the route from laboratory to pharmacy shelf is rarely plain sailing, and product roll-out delays — not to mention complete write-offs in some cases — can seriously eat into earnings projections and wash hundreds of millions of pounds in R&D expenses down the drain.

Indeed, GlaxoSmithKline’s chronic coronary heart disease inhibitor Darapladib — tipped by many as a potential revenues blaster in coming years — failed Phase III testing in November, forcing the firm’s boffins back to the drawing board. Investors should be aware of the huge cost of such failures on future earnings.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston does not own shares in any of the companies mentioned in this article. The Motley Fool has recommended GlaxoSmithKline.

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