Potential Avandia Lawsuits Threaten GlaxoSmithCline’s (GSK) Bottom Line

   

Recent reports on increased cardiac risks from using Avandia, a diabetes drug made and marketed by GlaxoSmithCline (GSK), threaten the more than $1 billion in annual sales Glaxo enjoys from the drug. More damaging is the news that the company may have known about the dangerous side effects well before the harmful effects were made public.

Will Avandia be the next Vioxx? You remember Vioxx, Merck & Co.’s (MRK) anti-inflammatory drug used to treat osteoarthritis. Merck pulled the drug in 2004 following reports of increased heart attack risk and stroke following high-dosage, long-term use of Vioxx.

Vioxx contributed some $2.5 billion annually to Merck’s sales, but the real damage came from the thousands of lawsuits claiming harm from using Vioxx. Merck finally settled the suits by agreeing in late 2007 to pay about $4.85 billion to Vioxx users.

So far, Glaxo has offered no similar settlement to Avandia users. It is, in fact, still in denial mode, saying that the evidence does not conclusively establish increased risk for heart attacks and denying that it hid information about the drug.

As with Merck’s experience with Vioxx, the actual loss from sales of Avandia is not expected to hit Glaxo’s bottom line very hard. Both drugs contributed about 1% to company earnings.

The real threat to Glaxo remains the certainty that a slew of lawsuits are about to hit the company, along with continuing negative publicity that those actions are sure to bring. A statement last week from U.S. Senators Max Baucus and Charles Grassley that Glaxo knew of Avandia’s dangers before the issue became public is very likely to increase the number of lawsuits related to the drug’s side effects.

In the company’s fourth quarter report for 2009, Glaxo notes that it has provided about $3.1 billion to account for legal disputes. In its discussion of pending legal matters, the company does not refer at all to Avandia-related lawsuits, the first of which is scheduled to go to trial this summer in eastern Pennsylvania.

Clearly, the company intends to defend itself vigorously against the Avandia claims. The results of the trial in Pennsylvania could well tell the tale. At the time that Merck settled its Vioxx claims, the company had successfully defended 12 cases and lost just five. But the possibility of an unending stream of costly litigation certainly helped Merck make up its mind to settle.

Time will tell if Glaxo will choose to follow the same course with its Avandia problems. For now, though, that looks like what the company has chosen to do.


Article printed from InvestorPlace Media, http://investorplace.com/2010/02/avandia-lawsuits-threten-glaxosmithcline-gsk-bottom-line/.

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