HEARD ON THE STREET: Glaxo's Celebrations To Be Short-Lived

16th Jul 2010 07:30

This story was originally published on Thursday. By Hester Plumridge A DOW JONES COLUMN It's a victory certainly, but it feels a little hollow. GlaxoSmithKline is close to settling a three-year dispute over the future of its diabetes drug Avandia, one of the U.K. drugs giant's top-five best-sellers. That should remove one uncertainty hanging over the shares, but doesn't solve GSK's main challenge: finding new blockbuster treatments. The market had been expecting U.S. regulators to remove Avandia from sale, following concerns its use increased the risk of heart attacks. Investors also feared GSK was on the hook for up to $6 billion in legal costs from personal injury claims. Instead, a U.S. advisory panel Wednesday voted to keep Avandia on the market, while GSK announced Thursday it was only making a GBP1.57 billion second-quarter provision for legal costs, which it expects to cover both outstanding and settled Avandia cases. The chances of regulators going against panel recommendations and banning the drug look slim. But the result comes too late to radically alter GSK's earnings outlook. In 2007, Avandia's contribution to group earnings was above 10%; next year it should contribute just 3.1%, with its U.S. patent due to expire the year after. As a result, GSK earnings forecasts are likely to be upgraded by just 3-6%, reckons Citigroup. That may provide a modest boost to the shares, but isn't enough to justify a re-rating. Like most other pharmaceutical majors, GSK's pipeline of new drugs looks unlikely to replace revenues lost as current bestsellers come off-patent and face generic competition. Its number one drug, asthma treatment Advair, faces U.S. patent expiry this year. GSK's shares trade broadly in line with the sector, at 8.9 times forecast 2011 earnings, versus 8.5 times for its large cap peers, notes UBS. Until GSK can offer investors a stronger growth story, share price progress is likely to be slow. (Hester Plumridge is a writer for Heard on the Street. She can be reached on +44 20 7842 9267 or [email protected]) TALK BACK: We invite readers to send us comments on this or other financial news topics. Please email us at [email protected]. Readers should include their full names, work or home addresses and telephone numbers for verification purposes. We reserve the right to edit and publish your comments along with your name; we reserve the right not to publish reader comments. (END) Dow Jones Newswires July 16, 2010 02:30 ET (06:30 GMT)