- GSK CEO Andrew Witty faced questions during Q2 earnings calls about GSK's alleged bribery charges in China but did not provide many details. - China's Ministry of Public Security said it had evidence GSK high-level executives were involved in commercial bribery and tax crimes in China. Several executives were arrested. - Witty stressed GSK has zero tolerance for improper behavior and is committed to investigating what happened, but noted some executives had acted outside of GSK's processes and controls. - Analysts grilled Witty on whether the situation called into question his leadership and if he would forego his bonus.

1. Reprinted by PharmAsia News (www.pharmasianews.com). Unauthorized photocopying prohibited.Reprinted by PharmAsia News (www.pharmasianews.com). Unauthorized photocopying prohibited.
DRUGS I BIOLOGICS I DEVICES
July 24, 2013
GSK CEO Andrew Witty Under Fire About China
During Q2 Call
GlaxoSmithKline PLC CEO Andrew Witty was fairly
mum about the company’s alleged bribery charges in
China during the company’s earnings call July 24. The
CEO held a call with media to discuss China specifi-
cally, ahead of the company’s normal call, presumably
to fend off China questions in advance.
Not surprisingly, journalists and analysts grilled him
throughout both events, with some asking if the turn
of events called into question his leadership capabil-
ity, and some asking if he would
forego a bonus this year.
Witty stayed close to prepared
talking points on the investiga-
tion, stressing, “From what we
understand from the authorities, it
appears that certain senior execu-
tives in the Chinese business have
acted outside of our processes and
our controls to both defraud the
company and the Chinese health
care system. To see these allega-
tions made about people work-
ing for GSK is, as we have said,
shameful. For me personally, they
are deeply disappointing.”
China’s Ministry Of Public Secu-
rity issued a statement on its website July 11 that
said it had gathered sufficient evidence in a prelimi-
nary investigation against high-level executives at
GSK China allegedly involved in commercial bribery
and tax-related crimes in China.
According to the statement, the public security min-
istry recently investigated GSK facilities in Changsha,
Shanghai and Zhengzhou. The ministry took “crimi-
nal compulsory measures” to arrest suspects. After
an initial interrogation, the suspects confessed to the
crimes, according to the ministry (“Public Security
Ministry Claims Evidence Of GSK Bribery In China;
Several Execs Arrested” — PharmAsia News, Jul. 11,
2013 4:04 PM GMT).
“To be crystal clear, we have zero tolerance for this
kind of behavior,” Witty said during the call with me-
dia. “I can assure you that we are absolutely commit-
ted to rooting out corruption and
we are absolutely committed to
getting to the bottom of what has
happened here.”
Witty said GSK has added re-
sources to the investigation and is
conducting an independent review.
He said the company would “learn
from this and make changes.”
When pressed about why he has
not gone to China himself, Witty
told reporters that GSK’s Euro-
pean and Emerging Markets
Head Abbas Hussain is lead-
ing the company’s day-to-day
response to Chinese authorities
(“All Eyes On GSK China As
Top Execs Dispatched To Beijing” — PharmAsia
News, Jul. 22, 2013 5:06 PM GMT).
“In the meantime,” he said, “let me say that we con-
tinue to be highly committed to China. We support
the efforts of the Chinese government to reform the
medical sector, and we are open to looking at all ideas
to improve affordability of and access to our medi-
cines, including change in our own business model in
GSK tried to highlight sales during its Q2 earnings call, but analysts and media grilled the CEO on
GSK’s China bribery allegations, which Witty did not expand upon except to say that some execs
acted outside of the company’s “processes and controls.”
“We support the efforts of
the Chinese government to
reform the medical sector,
and we are open to look-
ing at all ideas to improve
affordability of and access
to our medicines, including
change in our own business
model in China”
- GSK CEO Andrew Witty

2. Reprinted by PharmAsia News (www.pharmasianews.com). Unauthorized photocopying prohibited.
China. We have a long history and a very large foot-
print in China, and we continue to see the country as
a key place for further investment. We also continue
to believe that, in a country that is facing significant
health care challenges and with critical needs in areas
such as hepatitis B, respiratory disease and diabetes,
GSK has many important medicines and vaccines that
can potentially benefit the people of China.”
China At Inflection Point?
When asked what that change in its business model
might entail, Witty said that China was at “an inflec-
tion point,” and noted that a tiered pricing approach
might be an option. He said the company also would
look at other “evolutions” to make sure it remains in
step with China.
Witty may have been referring to the health care in-
frastructure in China in which most hospitals are run
by the government, but funding is not enough to sup-
port hospital operations, and doctors are paid signifi-
cantly less than Western peers. In response, hospitals
and doctors have turned to prescription drug sales as
a major source of income. Hospital pharmacies tradi-
tionally have charged a 15% markup, which encour-
ages overprescribing of more expensive drugs, and
kickbacks to doctors are often paid by distributors
and pharmaceutical companies (“Putting GSK’s Chi-
na Bribery Crisis In Context” — PharmAsia News,
Jul. 18, 2013 6:24 PM GMT).
Moreover, lowering prices in China actually can boost
volume significantly and increase sales. That was certain-
ly the case with Sanofi’s Plavix after the National Devel-
opment and Reform Commission imposed mandatory
price cuts earlier this year (“GSK’s Lamictal, Sanofi’s
Lantus Among Latest Round Of China Price Cuts” —
PharmAsia News, Jan. 9, 2013 4:32 PM GMT).
The CEO also said the China investigation is focused
on “a number of senior managers,” but that there
were no allegations against Mark Reilly, SVP and GM
China/HK Pharmaceuticals and Vaccines, and Steve
Nechelput, VP Finance China/Hong Kong.
Regarding whistleblowers, Witty said the company
encourages “people in the organization to speak up
if they have concerns. We had a series of complaints
earlier in the year and we investigated those fully,
and those have been fairly widely reported in the
press. We involved personnel from outside of China
in those investigations as well as personnel from in-
side China in those investigations. We explored all
of the various allegations and we were unable to find
any evidence of systemic abuse or any evidence or
material concern from those allegations.”
Witty is no stranger to Asia. The top GSK executive
previously was based in Singapore and led the group’s
Asia Pacific operations as its senior vice president be-
fore his accession to become the president of GSK Eu-
rope, and a member of the company executive leader-
ship team in 2003.
“As the leader of a major organization, my role is
clearly to try to make sure that we build a culture and
the values of the company which protect us from this
kind of thing, and then also to have in place the right
controls. It has been very clear to anybody who has
watched or seen GSK over the last several years that
that has been an absolute and unrelenting focus of
this organization,” Witty said.
“However, just as we see in all large organizations
– and, remember, we have over 100,000 employees
– there is unfortunately a risk that individuals can
sometimes do inappropriate things.”
Indeed, China has now overtaken the U.S. in terms of
the number of pharma sales reps employed by MNCs.
How to manage such a large sales team in a high-turn-
over environment with fast-rising costs and declining
productivity is a major challenge for Big Pharma. The
top 10 multinational companies increased their sales
reps from 5,500 in 2005 to 25,000 in 2011, a more
than four-fold increase.
In a recent report, McKinsey acknowledges that the
current Big Pharma model in China, which relies on
detailing to large hospitals where most prescriptions
are written and dispensed, has been a success. The top
10 pharma MNCs added more than $7 billion in Chi-
na sales in six years, reaching $9.7 billion in 2011, the
consultancy said (“To Grow Further In China, Big
Pharma Needs Innovative Commercial Models” —
PharmAsia News, Dec. 5, 2012 7:49 PM GMT).
Those sales have been fueled by a single-line sales
force model, where each product often receives its
own sales force, leading to a rapid expansion of sales
teams in China. For example, Pfizer Inc., the largest
Q2 2013 Group Turnover By Geographic Region
Region Sales
Growth
(constant currency)
U.S. £2.15 billion 5%
Europe £1.89 billion -1%
Emerging markets, Asia Pacific
(EMAP)
£1.74 billion 3%
Japan £435 million -3%
Other £393 million -3%
Source: GSK Q2 2013 press release

3. Reprinted by PharmAsia News (www.pharmasianews.com). Unauthorized photocopying prohibited.Reprinted by PharmAsia News (www.pharmasianews.com). Unauthorized photocopying prohibited.
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pharma company in China, now employs more than
4,000 sales reps in China.
During the larger Q2 review with analysts, GSK said
it does not plan on spinning out its Established Prod-
ucts Division. Witty said the company is reviewing
its portfolio to choose the right solution for various
blocks of businesses (“Emerging Markets Earnings
Roundup: Abbott, AbbVie, J&J, GSK (Part 3)” —
PharmAsia News, May 2, 2013 4:58 PM GMT).
“Most of the established products business is ex-U.S.
and consists of many brands and many SKUs. They
are looking at a variety of options that will maximize
savings and improve operating margins – for exam-
ple tender opportunities and streamlined manufac-
turing,” wrote Bernstein analyst Tim Anderson in a
same-day note.
Emerging Markets Group Sales See 7% Growth
For the numbers, group sales grew 2% in Q2, with the
U.S. pharma and vaccines business growing 5% and
7% in Emerging Markets and Asia Pacific (EMAP) for
pharmaceuticals. EMs represented more than 25% of
revenues. Vaccines sales declined 13%, reflecting the
timing of vaccine tender shipments. Sales were flat in
Europe during the quarter and Japan sales were down
5%, largely due to continued erosion of Paxil sales.
“GlaxoSmithKline reported 2Q core basic EPS of
26.3p (4% CER, 1% GBP) below our estimate of
27.2 but in-line with consensus,” Anderson wrote.
“Revenues of £6,618M (2% CER, 2% GBP) were in-
line [with] our figure of £6,619M but slightly above
consensus of £6,597M.
“We rate GSK as Market-Perform. GSK fell out of fa-
vor in 2H 2012 due to it walking down numbers twice
during the year, partly because of austerity and partly
because of various one-offs, as well as weaker Advair/
Seretide sales. This led to a “crisis in confidence” in
GSK’s ability to deliver on margin expansion and a
return to growth as it has previously guided for,” An-
derson said.
In China, GSK was at No. 8 among Big Pharma in
terms of sales at the end of 2012, and roughly at No.
13 among all pharma companies in China. It’s biggest
selling drug in China is respiratory drug Seretide, with
sales of RMB 831,425,034 ($135.44 million) at the
end of 2012, according to IMS Health.
Seretide saw group total sales in Q2 of £1.35 billion,
with £708 million coming from the U.S. (8% growth
CER) £376 million coming from Europe (-1% growth
CER) and £117 million coming from EMAP with
14% growth.
EMAP Pharmaceuticals and Vaccines turnover for
Q2 grew 5% to £2.324 billion, with particular con-
tributions from the Middle East/Africa and China.
Pharmaceuticals sales grew 7%, led by antibacterial
Augmentin, up 18% to £202 million, and Seretide up
11% to £223 million. Vaccines sales fell 5% to £472
million, largely reflecting the phasing of tender deliv-
eries, particularly of Synflorix.
Japan Pharmaceuticals and Vaccines turnover fell 6%
to £830 million, as a 4% growth in pharmaceutical
sales was offset by the 80% decline in vaccine sales.
“As far as Japan is concerned, we’ve clearly seen a
slowdown in the HPV marketplace and over the last
year, we’ve seen a significant share decline for Cervar-
ix,” Witty said during the analyst call. “I don’t think
we’re going to see anything very dramatically change
in that scenario. Rotarix is a rotavirus and much more
positive situation where we continue to hold very sub-
stantial share, despite new entrants. I think rotavirus
is likely to develop into a continued positive story. I
think on the HPV side, less so.
By Tamra Sami