The pharmaceutical industry has a bad rep when it comes to corruption in general and bribery in particular. For example, French drugmaker Sanofi (NYSE:SNY) recently fessed up to U.S. authorities about an illegal payment scheme to doctors in East Africa and the Middle East designed to boost the company's drug sales.
Given the widespread nature of this problem, Western authorities have taken a keen interest in the activities of their biopharmaceutical companies both abroad and at home. British pharma giant GlaxoSmithKline (NYSE:GSK) in particular has become a huge target for authorities after garnering a record fine in China last month for an illegal kickback scheme to doctors.
Glaxo's so-called "China scandal" concluded with the communist government handing down a record $491.5 million fine. But perhaps even more troubling is that a plethora of similar bribery allegations popped up in Lebanon, Iraq, Jordan, Poland, and Syria after the case in China broke last year.
New allegations in the UAE might be too much for authorities to overlook
Glaxo is now being accused of bribery in yet another country, the United Arab Emirates, or UAE. According to reports, a whistleblower's email to the company's top management outlined a system of improper kickbacks for an array of health care facilities and personnel (doctors, hospitals, pharmacists, etc.) to fuel sales of pharma products in the Gulf state. For its part, Glaxo's management condemned the actions of employees allegedly involved in the bribery scheme, saying the company has zero tolerance for such conduct and vowing a full investigation.
Glaxo CEO Andrew Witty has taken a lot of heat for these bribery investigations, with many calling for his resignation. Shareholders have certainly not been pleased, as these scandals have helped drive the stock down by a whopping 15% so far in 2014:
The problem is that the corruption looks pretty widespread to an outsider like me. And indeed, the U.S. Department of Justice and the U.K. Serious Fraud Office previously opened investigations into the company to establish whether a "pattern of corruption" exists at Glaxo. This latest allegation isn't going to help matters.
Glaxo has bigger problems than bribery allegations
Glaxo is far from unique when it comes to being accused of bribery in the pharma industry. As a result, investor focus is likely to remain on the company's faltering top-- and bottom lines going forward. Mainly because of falling sales for its respiratory drug Advair, Glaxo saw earnings per share drop by a massive 36% last quarter, compared to the first quarter, making it one of the company's worst quarters on record. The slow uptake of Breo Ellipta as Advair's successor has also hit the company's bottom line particularly hard of late.
Apparently Glaxo is feeling the pressure to create growth from somewhere, presumably leading to the deal earlier this year with Novartis (NYSE:NVS), where Glaxo exchanged its profitable oncology unit for Novartis' flagging vaccine segment. So far, this deal looks like Novartis got the better part of the deal, given that the group of vaccines being shipped off to Glaxo saw their sales drop by 14% in the second-quarter.
Can Glaxo turn things around? I am becoming more doubtful by the day. These scandals could end up costing the company billions in fines when it's all said and done. And Andrew Witty hasn't made the right moves on the acquisition or R&D fronts to replace lost revenues from Advair and Lovaza.
More globally, all Big Pharmas are undergoing a major transition right now, as they confront tighter regulations and the ongoing patent cliff. Some companies like Amgen, Eli Lilly and Merck have met these challenges head on by developing major new drugs that have enormous commercial potential. By contrast, Bristol-Myers Squibb, Pfizer, Glaxo, and even Sanofi to a degree, have all struggled mightily in this new world. In short, I think Glaxo will end up being one of the losers during this transitory period, with these scandals being symptomatic of its larger commercial problems.
George Budwell has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.