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Getting Glaxo Back to Good Health

Tickers in this article: GSK NVS RHHBY SNY

NEW YORK ( TheStreet) -- Shares of GlaxoSmithKline 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 and Novartis been implicated in the scandal, but back in August, I raised concerns about Sanofi , 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?

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.