This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Getting Glaxo Back to Good Health

NEW YORK (TheStreet) -- Shares of GlaxoSmithKline (GSK - Get Report) have gone nowhere in six months. As disappointing as that may be for current shareholders, I believe it's been a victory for a company, which has been flooded in a wave of negative news involving (among others) a bribery scandal in China.

Although the details are still being sorted out, it was reported in July that Glaxo was alleged to have secretly funneled close to 3 billion yuan, or what amounts to almost $500 million in U.S. dollars to travel agencies so that they can distribute to Chinese doctors and officials. This news prompted an immediate probe by the Chinese police.

In fairness, although Glaxo has generated more than its share of bad publicity regarding this incident, it's worth noting here that it's not the only drug company that has been linked to these scandals. Not only have Swiss-based rivals Roche (RHHBY) and Novartis (NVS) been implicated in the scandal, but back in August, I raised concerns about Sanofi (SNY), which was (then) alleged to have paid over 500 Chinese doctors an estimated $274,000.

Sanofi's payments, meanwhile, were said to have been disguised as grants. But according to authorities, they were said to have been compensation for doctors to prescribe Sonofi-branded drugs to their patients. Now, I'm not making light of what is really a serious situation in the entire sector. Nor am I rushing to acquit any of these companies of their charges. But it's worth asking why hasn't these Chinese doctors been prosecuted. To say it another way, why are they so easily bought?

Must Read: Jim Cramer's 6 Stocks in 60 Seconds: FSLR YELP GPS SODA CRR PRGO (Update 1)

It's not exactly news that the Chinese healthcare system has always been perceived as "tainted" -- particularly due to low doctor salaries. Instead, corruption (in various forms) has supplemented shrinking budgets. It's always been normal operating procedure. In that regard, until there are clear healthcare reforms in China, it's tough for anyone to jump to any real conclusions without knowing truly where the blame begins. Nevertheless, Galxo's image needs to heal.

Given the dire circumstances in China, not a whole lot was expected this quarter in terms of revenue. But I was nonetheless surprised by the magnitude of the decline. Glaxo posted a 61% year-over-year decline in Chinese revenue. The good news, however, and equally surprising, was that despite the horrific Chinese numbers, Glaxo's worldwide sales of 6.51 billion pounds ($10.6 billion) were (only) flat year over year.

What's interesting here, though, is that third-quarter revenue in China were up for not only Roche and Novartis, but also Sanofi. Clearly, Glaxo has taken a bigger hit than its rivals. And at this point, I don't have any logical answer as to why that is, especially since China accounts for just over 3% Glaxo's worldwide sales last year.

Investors should nonetheless be encouraged that even with the flat revenue worldwide and the decline in China, management still delivered almost 30 pence in core earnings per share, which was up 10% year over year. Analysts, meanwhile, were forecasting core earnings of 27.2 pence when excluding certain items.

As disappointing as the numbers might have been, the news has done very little damage to the stock. And I believe the company's improving product pipeline has had a lot to do with the support. Even though Europe's austerity situation continues to weigh on revenue growth, management has spoken positively about new cancer drugs and treatments for HIV and lung disease, which have received regulatory approval.

To that end, while I'm not ready to say Glaxo is completely out of harm's way, there's nothing left in this story to suggest that these shares are any riskier now than before. Not to mention, management is calling for revenue growth for the year to be around 1% (local currency), with earnings climbing as high as 4%. With Glaxo shares trading at around $52, investors can expect the stock to reach $60 to $65 in the next 6 to 12 months.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Richard Saintvilus is a co-founder of where he serves as CEO and editor-in-chief. After 20 years in the IT industry, including 5 years as a high school computer teacher, Saintvilus decided his second act would be as a stock analyst - bringing logic from an investor's point of view. His goal is to remove the complicated aspect of investing and present it to readers in a way that makes sense. His background in engineering has provided him with strong analytical skills. That, along with 15 years of trading and investing, has given him the tools needed to assess equities and appraise value. Richard is a Warren Buffett disciple who bases investment decisions on the quality of a company's management, growth aspects, return on equity, and price-to-earnings ratio. His work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets.  

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
GSK $40.70 0.77%
AAPL $118.03 -0.71%
FB $105.41 -0.31%
GOOG $748.15 -0.02%
TSLA $229.64 5.22%


Chart of I:DJI
DOW 17,813.39 +1.20 0.01%
S&P 500 2,088.87 -0.27 -0.01%
NASDAQ 5,116.1430 +13.3350 0.26%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs