GSK profits up despite safety scares

Investors in the UK's largest and the world's second largest pharmaceutical company breathed a sigh of relief on 25 July, when GlaxoSmithKline (GSK) posted a profit rise of nine per cent for H1 FY07.

The best news for investors was that GSK almost tripled its share repurchase programme to GBP 12bn over the next two years, while shares increased in value by GBP 0.29 to reach GBP 12.75.

The safety fears over diabetes drug Avandia (roseglitazone) were offset by an increase in turnover of three per cent, as growth in key products fought back against generic competition. The company revealed a second interim dividend of GBP 0.12 per share or GBP 0.24 for H1 FY07.

GSK posted a one per cent drop in profits to GBP 4bn on sales that were three per cent lower at GBP 11.3bn. However, taking into account exchange rate fluctuations, sales were, in fact, up three per cent and profits increased nine per cent.

As a result, GSK maintained its FY07 earnings guidance, which predicts growth of eight to 10 per cent at constant exchange rates.

The positive news was tempered by the revelations that the FDA Advisory Committee is due to make its ruling regarding Avandia on 30 July. There are three possible scenarios: a vote to impose new regulations governing the sale of Avandia; a proposal to ban the drug which would impact heavily on GSK's profits and industry standing; or that the committee will defer making a decision until later in the year.

Whatever the outcome, the outlook for Avandia is not good. Lehman Brothers analysts have been reported as saying that their conversations with doctors at the American Diabetes Association meeting have shown that as a brand, Avandia has been significantly tarnished by safety concerns and will probably never regain its market share.

New US prescriptions for Avandia have plummeted 46 per cent since a study was published in the New England Journal of Medicine by influential cardiologist, Dr Steven Nissen. He claimed that he had uncovered a link between Avandia and an increased risk of heart attacks and resultant deaths.

Despite global Avandia sales falling 22 per cent to GBP 349m, EU sales of the drug rose 20 per cent to GBP 63m. This rise is tempered by the fact that the health scares have only affected Q2 sales.

Positive results included the Asthma treatment Advair, sales of which were up 12 per cent to reach GBP 871m. Also, GSK's consumer healthcare arm posted record sales of GBP 899m, up 18 per cent in Q2 FY07.