Why GlaxoSmithKline plc Has Further To Fall

gskInvestors in pharmaceutical giant GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) have taken a beating lately. At 1450p, the stock is 15% off its 52-week high of 1706p.

In fact, the only piece of good news lately is that Glaxo has settled its Chinese corruption claim for £297m. That may be the largest ever corporate fine in China, but given regulatory fine inflation in the banking industry, it looks relatively modest.

Glaxo can manage the payout from existing cash resources, and the associated costs and charges should be included in its Q3 results.

That has lifted one cloud hanging over Glaxo, but put those sunglasses away, because there is plenty of regulatory rain ahead.

Glaxo Got Off Lightly

When faced with overwhelming state power, all you can do is grovel.

Glaxo has confessed all the facts and evidence, admitting funnelling £320m in bribes to doctors and health officials via travel agencies, and issuing an apology to Chinese patients, doctors, hospitals, government and people.

Executive Mark Reilly will be glad to get away with a three-year suspended sentence and deportation order. The penitent company will free to continue in a country it has had a presence in for nearly a century.

Glaxo and other UK companies will have to tread carefully in future, however. The Chinese anti-corruption campaign has been emboldened by its high-profile success, and hungry for more blood.

The bad news is that Glaxo’s apology could have ramifications over here.

The Yanks Are Coming

Glaxo’s confession could persuade the UK’s Serious Fraud Office to intensify its own investigation into the company. Analysts say it could now face proceedings in the UK, under section 7 of the Bribery Act.

The long arm of the US Department of Justice is also limbering up to strike Glaxo. Its stock is traded on US exchanges, which makes it vulnerable under the US Foreign Corrupt Practices Act.

FTSE 100 companies have had a taste of the US regulatory lash in recent years, and it smarts. In July 2012, Glaxo was itself ordered to pay $3 billion after pleading guilty to charges of illegally marketing drugs and withholding safety data from US regulators. That was the largest healthcare fraud settlement in US history.

You would think Glaxo would have learned from that, but clearly not. It also faces bribery allegations in Iraq, Poland, Syria, Lebanon and Jordan. Chief executive Sir Andrew Witty could have more apologising to do.

£297m may be just the start.

Pain And Gain

So there could be more pain to come for Glaxo investors. The continuing uncertainty is largely reflected in today’s price, 12.77 times earnings. It’s not often you can buy Glaxo at such a discount.

Better still, it yields 5.38%, way above the FTSE 100 average of 3.4%. Glaxo could fall further as the fines roll in, but at today’s price, that’s a risk long-term investors may be happy to take.

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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.