GSK Sales off 61% Post-Scandal. Consider it a Down Payment

Wednesday, October 23, 2013 8:21
Comments Off on GSK Sales off 61% Post-Scandal. Consider it a Down Payment

If history is a guide for the future, than GSK (and others) really should have paid more attention 5-6 years ago when SIEMENS was caught up in a similar scandal involving their medical equipment.  Sadly they didn’t and a few months ago when the story broke that they were under investigation, it was clear to many that it was going to be ugly… and ugly it has got.

As CNBC has just reported:

GlaxoSmithKline’s pharmaceutical and vaccine sales to China tumbled 61 percent in the third quarter, as the drugmaker was hit by an ongoing bribery investigation in the country.

SIXTY ONE PERCENT!!

Now, of course, GSK executives are putting their best spin on it (they have no other choice) by saying they will do what ever it takes to make things right:

We continue to co-operate with the authorities and we remain fully committed to supplying our products to patients in the country. At this stage, it is it is still too early for us to quantify the longer-term impact of the investigation on our performance in China,” Glaxo said when it reported results at 12 p.m. London time.

But.. I’m going to go out on a limb here and say that this ride is far from over.

In fact, I’d say it is going to get far worse for GSK, and for many other brands in the industry.

Here is why.

Regardless of what readers may or may not know of the scandal, GSK (and othere) moved hundreds of millions of dollars from its accounts into the pockets of various Chinese officials, doctors, and hospital administrations using a system that I have illustrated above.

Now, GSK wants to maintain that this was due to a few unscrupulous employees. Ok.  Who am I to question how the entire governing structure (including auditors), internal and independent, missed the ANNUAL 100-150+ million USD in travel related costs.  So… I’m only going to focus on the fact that going forward GSK’s (and others who had a few scapegoats go off the reservation) real issue is now one where several of their P’s (as in the 4 Ps of marketing) have gone poof.

1) Promotion.  Thinking back to how these payments were made, why they were made, and to whom they were made, one thing should be made clear.  That entire system is GONE.  which means that GSK (and others) are now going to have to rebuild how they are able to promote their products.  this may happen through new agents, or through a bulking up of the sales team, but to get their product in front of the people who make decisions is going to take time.  Particularly as now many buyers, who aren’t interested in looking tainted themselves, are likely going to shy away from buying any of the brands caught up in this scandal .. as will doctors

2) Pricing.  Perhaps you didn’t see the news that came early in the process, but with GSK’s entire business under investigation, the government as able to get a price concession from GSK (and others) who had to admit they were charging too much.  A common theme these days.

Which is where this gets very interesting for me.

Because for years, while firms (and their consultants) have been saying that the only way to make it in China is to do things the “china way” .. wink.  wink.  there has been a clear move locally to stomp out correuption in areas that are the most sensitive to socioeconomic pressures…. like in hospitals where violence has been on the rise as patients get screwed by the system… and as a result multiple pharmaceutical firms that were banking on Chinese profit to keep their firms afloat are now in a very different position.  A position where global law firms, representing institutional investors, are likely preparing their legal options, as they already have with YUM following their series of scandals, and that could lead to some interesting changes in how these firms are managed going forward.

So, for all of you out there playing the “China game”, my advice to you is to take heed of what is happening here, and if you are in an industry that is hot on the radar of the government, my recommendation is that you take action before the government does.

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