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Why The Chinese Corruption Saga Makes GlaxoSmithKline plc A Dicey Pick

Today I am looking at why GlaxoSmithKline’s (LSE: GSK) (NYSE: GSK.US) troubles in China could be set to endure.

Chinese problems continue to mount

Make no mistake: GlaxoSmithKline’s ongoing bribery saga in China shows no signs of disappearing any time soon. Allegations initially emerged in June last year that the company was operating a vast slush fund to bribe doctors with cash and other incentives to massage sales figures. The complexity of the case always made a quick resolution highly unlikely, but the stream of bad news seems to have upped a notch or two in recent weeks.

In May Chinese prosecutors announced that the firm’s former head of Chinese operations, Mark Reilly, would stand trial on corruption ChinaFlagcharges. Shortly afterwards the UK Serious Fraud Office announced that it had “opened a criminal investigation into the commercial practices of GlaxoSmithKline and its subsidiaries.” And the company’s admission last month that it was in possession of a secret sex tape including Reilly and his girlfriend came as a further embarrassment to the firm.

News has since emerged that a British corporate detective and his wife, apparently hired by the firm last year, will be tried in a Chinese closed courtroom in August. Peter Humphrey was detained by authorities last July for illegally acquiring information on private individuals — the investigator was employed by GlaxoSmithKline to investigate a former employee accused of orchestrating a smear campaign, the Financial Times reports.

The business has not been directly implicated in the case, but the timing of the action has raised questions over the true reasons behind the detective’s detention so soon after state investigations were launched. And to muddy the waters further, Humphrey has alleged that GlaxoSmithKline said that it had conducted its own investigations and that claims of corruption in the country were baseless.

Next month’s courtroom battle seems to suggest that Chinese authorities remain set on playing hardball with the company, which has already suffered a huge revenues knock in the country — GlaxoSmithKline warned in October that sales in China had fallen by 61% during July-September And the pharma play saw Pharmaceutical and Vaccines turnover in the country drop by almost a fifth during the first three months of 2014 to £137m.

Accusations of bribery are not confined to China, however, as GlaxoSmithKline is also facing investigations in Poland, Jordan, Lebanon and Iraq. Although actions in these countries will of course not prove as disastrous for the turnover column as in China, these investigations hardly do the firm’s tarnished reputation any favours.

I have previously argued that the importance of GlaxoSmithKline’s suite of market-leading products to the Chinese population would take precedence over any long-term crippling legal action for the firm. But as the case in China becomes more and more lurid and convoluted, and investigations pop up in other geographies, the pharmaceuticals firm could be set for persistent sales troubles for some time to come.

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> Royston does not own shares in GlaxoSmithKline. The Motley Fool has recommended shares in GlaxoSmithKline.