GSK faces Q4 profit wipe-out on $3 billion legal hit

GlaxoSmithKline will record a legal charge of 2.2 billion pounds ($3.4 billion) for the fourth quarter, effectively wiping out its profit, as it settles further claims related to Avandia and sales practices.

The charge equates to an after-tax cost of 1.8 billion pounds, more than the 1.45 billion the drugmaker had been expected to make in net income during the three months to December, according to Thomson Reuters consensus forecasts.

Shares in Britain’s biggest pharmaceuticals group fell 1.6 percent on the news, underperforming a 0.7 percent advance in the European sector.

“We recognize that this is a significant charge, but we believe the approach we are taking to resolve long-standing legal matters is in the company’s best interests,” the company’s head of global litigation, PD Villarreal, said in a statement.

“We have closed out a number of major cases over the last year and we remain determined to do all we can to reduce our litigation risk.”

The charge comes after a 1.57 billion pounds hit taken in the second quarter, which was also related in part to claims surrounding GSK’s controversial diabetes pill Avandia.

CLEARING THE DECKS

“The fact that this has come two quarters after the previous one will make people worry ... but it doesn’t change the underlying progress the company is making,” said Dominic Valder, an analyst at Evolution Securities, who rates the stock a “buy.”

“There is a new CFO just starting and there is a clear trend change in the underlying profitability of the company as a new portfolio of products starts to dominate growth, so now is an obvious time to try and clean up the beast.”

Goldman Sachs investment banker Simon Dingemans will succeed Glaxo’s current chief financial officer, Julian Heslop, when he retires in March.

The latest hit covers provisions for an investigation by the U.S. Attorney’s Office for the District of Colorado into sales and promotional practices for a range of products between 1997 and 2004—an issue that has also hit other drugmakers, including Pfizer—alongside fresh money set aside to settle Avandia claims.

GSK said back in July that it had settled the majority of Avandia claims but, since then, it has received a substantial number of new product liability cases.

Avandia was once Glaxo’s second-biggest drug, with sales of around $3 billion a year. Since 2007, however, it has been in decline after it was first linked to heart attacks.

It sold $1.2 billion in 2009 but sales are expected to tumble to insignificant levels following curbs on its use and a decision by the company to stop promoting the medicine.

###

By Ben Hirschler

LONDON