The Risks Of Investing In GlaxoSmithKline Plc

Today I am highlighting what you need to know before investing in GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US).

Chinese walls closing in

Needless to say, one of the biggest challenges facing GlaxoSmithKline is what the ongoing corruption investigation in China is likely to mean for future earnings. With two corporate investigators, who allege to have been hired by the pharma giant to investigate bribery lGlaxoSmithKlineeaks in the country, about to be put in the dock for charges of illegally purchasing and selling information, China is clearly prepared to drag the company through the mud.

The waters have been muddied further by news that three former employees of GlaxoSmithKline’s Chinese division are suing the firm for illegal dismissal. The plaintiffs are also claiming reimbursement for unpaid expenses used to bribe medical staff and which were signed off by company management, Reuters reported.

The division’s former head, Mark Reilly, is accused by state prosecutors of overseeing a ‘massive bribery network‘ and is currently detained along with two other high-level executives. Sales in the country have headed through the floor as a consequence, and with more twists likely to emerge in this long-running saga, huge questions remain over GlaxoSmithKline’s future in this mammoth marketplace.

Health plans play hardball

The pharmaceuticals sector’s big players have seen earnings take a significant dent in recent years, as the loss of exclusivity across a number of high-profile earnings drivers has enabled generic substitutes to take a chunk out of their market share.

But the likes of GlaxoSmithKline are also being put on the back foot by many healthcare scheme operators, who are becoming more reluctant to shell out a premium to acquire certain treatments in the light of rising bills, a move which threatens to drive the sector into a bloody price war.

As The New York Times reported last month, Express Scripts — by far the biggest Pharmacy Benefit Manager (PBM) in the US, entities whose remit includes processing and settling prescription drug benefits — has stopped paying for GlaxoSmithKline’s Advair respiratory product as well as a number of other high-profile labels.

Advair alone currently accounts for a fifth of GlaxoSmithKline’s revenues, and with many generic firms tipped to introduce their cheaper alternatives from 2016, the Brentford-firm’s top line could be set for severe turbulence in coming years.

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Royston Wild has no position in any shares mentioned. The Motley Fool recommends GlaxoSmithKline.