British pharmaceutical giant GlaxoSmithKline, announced this Thursday that its second-quarter charges related to legal cases involving the two drugs Avandia (diabetes drug) and Paxil (drug for anxiety and depression) would run up to $2.36 billion. Avandia’s use and its potential risk of causing heart problems were being debated this week by an advisory panel to the US Food & Drugs Administration (FDA).
While investors welcomed this announcement, stock analysts feel that the action taken by the FDA was better than expected and the $2.1 billion charge set a likely ceiling on the company’s legal liabilities. As a result the stocks also moved upwards late Wednesday after the advisory committee voted, and again Thursday after the announcement of the charge for legal issues. End of the day the stocks were up by 2.3 percent, to $37.21 in a market that declined slightly overall and rose slightly in most other pharmaceutical stocks. Since a low point on Wednesday afternoon before the FDA vote, GlaxoSmithKline’s stock has risen by nearly 5 percent. Shares rose 21.5 pence, or 1.8 percent, to £12.03 a share in London. Reported profits of the company were about $8.4 billion for 2009.
Avandia was the widest selling diabetes drug until reports appeared in 2007 that it was linked to increased risk of heart problems like heart attacks, heart failures and strokes and heart related deaths. Sales plummeted thereafter. In a 2007 advisory panel meeting the drug was given no health warnings. In the recent vote on Wednesday however the expert panel was skeptical about the complete safety of the drug. After the final vote and decision Avandia remains in the market but will be sold with a warning.
It was initially feared that Avandia lawsuits would cost the company around $6 billion. However on Thursday GSK spokesperson announced that charges would go up to $2.1 billion after taxes inclusive of “provisioning for settled cases and an estimate for those cases which we have received and are still outstanding.” Paxil also faced a “vast majority of product liability cases” which was settled. GSK also entered an agreement with the United States attorney’s office in Massachusetts and the Justice Department to pay $750 million to settle the investigation of its manufacturing plant in Cidra, Puerto Rico after the 2007 censures from the regulators related to quality control issues.
Dan Troy, general counsel for GSK said, “The charge we have announced today reflects the company’s ongoing efforts to resolve certain longstanding legal cases…This represents a substantial proportion of GSK’s outstanding litigation. This progress is helping us to reduce financial uncertainty and risk for shareholders.”
The annual report for 2009 at GSK has an eight page report only on the legal proceedings citing the 17 disputes over intellectual property, five lawsuits related to product liability, six to do with marketing and promotion and three each for anti-trust, wholesaling and corporate matters. These reflect the legal quagmire most pharmaceutical giants are in.
However, Jeremy Batstone-Carr, a pharmaceutical sector analyst at Charles Stanley & Company in London said that this announcement means that GSK was trying “to put the legal issues over these products into the past.”
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