Glaxo's $25 billion buyback softens Avandia blow

26 Jul, 2007

GlaxoSmithKline Plc nearly tripled its share buyback programme to 12 billion pounds ($25 billion) on Wednesday, boosting its shares even as sliding sales of diabetes drug Avandia held back second-quarter profit.
The news was welcomed by investors in the world's second largest drugmaker, who have seen the stock plunge since a US study in May said Avandia raised heart attack risks.
Glaxo kept its forecast for 2007 earnings growth of 8 to 10 percent at constant currencies, but signalled this depended on results of a US regulatory review of Avandia next week. It plans to release new study data endorsing Avandia on Thursday.
The shares ended up 2.3 percent at 12.75 pounds, the biggest blue chip gainers in London, after news of the net 7.7 billion pounds increase in the buyback programme. Glaxo expects to complete the 12 billion pound programme, the size of which Chief Executive Jean-Pierre Garnier said was unprecedented in the drug industry, over the next two years, adding it would not affect Glaxo's flexibility to do deals.
"It's certainly very aggressive," said Nomura Code analyst Mike Ward of the buyback. But he said it was supported by strong performances of established drugs such as Advair for asthma and continued progress in a strong pipeline of new medicines. "That's all been rather overshadowed recently by the Avandia situation," he added.
Standard & Poor's affirmed its 'AA' credit rating for Glaxo, arguing the buyback plan was evidence of a more aggressive yet still conservative financial policy. Second-quarter pretax profits were flat at 1.9 billion pounds, equivalent to earnings per share of 24 pence. Analysts had on average forecast 23.4p, according to Reuters Estimates.
Sales slipped 2 percent to 5.67 billion pounds, also held back by generic competition to older products such as anti-nausea drug Zofran and a weak dollar. Because Glaxo makes half its money in the United States, the weak dollar takes a heavy toll and the company said if exchange rates were to hold at second-quarter levels the adverse impact on EPS growth for the full year would be around 6 percent.
Glaxo has mounted a fierce defence of Avandia, its second biggest-selling product, but prescriptions have slumped since top cardiologist Steven Nissen published his critical study on May 21. Worldwide sales of Avandia products in the three months to June dropped to 349 million pounds from 477 million a year ago.
The US Food and Drug Administration is to hold an advisory meeting on July 30 to discuss the safety of Avandia and industry analysts say the drug's future - and Glaxo's near-term profits - will depend heavily on the outcome.
Garnier said Glaxo would present "important new information" before the FDA meeting based on an analysis of 400,000 diabetes patients, comparing all the commonly used anti-diabetes drugs.
Assuming Avandia gets a safety green light, the company plans to re-launch the product in the United States. Garnier added he was increasingly optimistic about Glaxo's pipeline of new drugs, saying the firm had the opportunity to launch up to 25 new products in 2007-9. Richard Hunter, head of UK Equities at Hargreaves Lansdown, said the new buyback and upbeat comments had caused a collective sigh of relief but the company was not out of the woods yet.
Recent concerns about Avandia, coupled with nagging investor doubts about the pipeline, have punished Glaxo's shares, which trade at just over 12 times forecast 2008 earnings - a 17 percent discount to the European sector average. Glaxo's results follow a generally healthy results season so far for the world's top drug companies, although Pfizer disappointed after sales of its top-seller Lipitor fell sharply.

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