GlaxoSmithKline (GSK) recently issued a statement regarding the findings of a Senate Committee on the company’s diabetes drug Avandia. The company stated that the conclusions drawn by the Committee on the safety of Avandia are based on analyses that are not consistent with the scientific evidence supporting the safety of the drug.
According to the report issued by the Committee, Glaxo was aware of the potential heart risk associated with the use of Avandia before this information became known to the public. The Committee has also recommended that Avandia should be withdrawn from the market.
Avandia is a thiazolidinedione anti-diabetic agent indicated as an adjunct to diet and exercise to improve glycemic control in adults with type II diabetes. The product first came under fire in 2007 when the New England Journal of Medicine published an analysis of studies conducted with people who had taken Avandia.
According to the analysis, a higher risk of heart attack was observed in patients taking Avandia compared to patients taking other diabetes drugs or no diabetes medication. Avandia’s label was revised to include a warning regarding the potential cardiovascular risk.
Following the emergence of safety concerns related to the use of Avandia, Avandia/Avandamet franchise sales plunged to $1.5 billion in 2008 from $2.4 billion in 2007.
With safety concerns regarding the use of Avandia re-emerging, we expect Avandia/Avandamet franchise sales to decline further. While there haven’t been any estimate revisions over the past 7 days, 7 of the 10 analysts following the stock have reduced their annual estimates for 2010 over the last 30 days. There have been no upward estimate revisions during this period.
On balance, the estimate for 2010 is down 19 cents per ADS in the last 30 days. If annual results come in line with expectations, 2010 EPADS would increase only 2% year over year.
Meanwhile, 2011 estimates are also down 17 cents over the last 30 days with 4 of 7 analysts following the stock reducing their estimates. There have been no upward estimate revisions during this period.
With several products expected to lose exclusivity and the swine flu opportunity likely to miss expectations, we expect Glaxo’s top-line to remain under pressure in the coming quarters.
In terms of earnings surprises, Glaxo had a modest positive surprise (1.79%) in the fourth quarter of 2009 and a 3% negative surprise in the third quarter of 2009, with the four-quarter average of positive 5.76%. This means that, on an average, Glaxo has come ahead of the Zacks Consensus by 12.78% over the last four quarters.
Our long-term recommendation on Glaxo is Underperform which is supported by the Zacks Rank #5 (“Strong Sell”). While Glaxo’s diversified base and presence in different geographical areas should help support revenues, we remain concerned about future growth prospects given the patent challenges being faced by several of Glaxo’s products.
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