Why GlaxoSmithKline plc (ADR) (GSK) Will Survive the China Scandal

GlaxoSmithKline plc (ADR) (NYSE:GSK) has been accused of the violation of Chinese laws wherein the company’s key officials have used around 700 agencies and firms for increasing the sales and prices of drugs by bribing hospitals and doctors in China. The company has transferred around $489 million to these agencies. Four of the company’s executives are detained. This includes the vice president, the legal affairs director, the business development manager and the human resource director.

However, this should not be much of a concern as the company is in continuous process to rectify its fault and cut down the prices. Also, this is more of an inborn problem of China, rather than the company itself. It is the management of Chinese hospitals and the government who are responsible for such a shameful event.

Low prices for hospital services, as enforced by government, leaves no option but to keep the price of drugs high to make a profit. Instances such as these make it clear that it is not the drug making company, but individuals involved in the process that are responsible, and this should not have any long term effect on the functioning of the company.

Let us have a look at some of the key points that will help GlaxoSmithKline plc (ADR) (NYSE:GSK) come out of this short term problem.

Strong fundamentals

Half yearly results for 2013 have shown an increase in EBITDA by 13% to £3997 million. EBITDA margin for the period increased by 400 basis points to 31% compared to the first half of 2012, indicating increased operating efficiency. Operating and free cash flows have been positive in the past five years. The debt component in the capital structure is higher than its peers. Yet a high interest coverage ratio of 72 indicates that the company has managed its debt very efficiently and is generating enough revenue to meet its debt obligation. Investment returns are also very high with ROE and ROA being 54.5% and 10.1%, respectively, as compared to the industry average of 11.2% and 5.7%, respectively.