GlaxoSmithKline Could Sink on Recent Events

Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

GlaxoSmithKline (NYSE: GSK) stands as a major global pharmaceutical and consumer healthcare company. GlaxoSmithKline is a leader in medication research. The company's Consumer Healthcare Products group manufactures over-the-counter medicines, oral care, dental care, and nutritional goods.

At the end of October, GlaxoSmithKline released its third quarter results. The company posted earnings of $0.71 per share, below the estimated $0.89 per share. Compared to the same quarter of 2011, earnings dropped 21.1%. Year-over-year revenues fell 8.8% to $10.3 billion, but Wall Street expected $10.6 billion in revenues for the quarter.

GlaxoSmithKline's pharmaceutical product and vaccine sales decreased 6%. The reason cited was diminishing prices and margins in the European Union. Sales declined 6% in the U.S. However, there was a sales increase of 11% in Asia. The decline in the U.S. was primarily due to competition from generics.

GlaxoSmithKline bought back $3 billion worth of shares so far in 2012, moving closer to its target of $3.96 billion. The restructuring program stands on the mark for 2014. About $3.96 billion in savings has been already realized, with a target of $4.43 billion.

For 2012 guidance, GlaxoSmithKline expects some revenue growth during the fourth quarter. Overall, the expectation for year-to-year revenues remains flat.

A continued agreement was signed with Pfizer (NYSE: PFE) regarding its joint venture ViiV Healthcare, which specializes in AIDS medications. The Human Genome Sciences acquisition has been finalized, providing GlaxoSmithKline with Benlysta, a lupus drug.

Future Products

GlaxoSmithKline has six new drugs in late trials that it will seek approval of within a year. Albiglutide, a new type of diabetes medication, that GlaxoSmithKline developed with Human Genome Sciences before the acquisition, will be before the FDA soon. Albiglutide exists in a niche class, but there will be competition from new diabetes compounds from AmylinSanofi and Eli Lilly. Albiglutide has some edge over its competition, especially in ease of administration.

Approval of this compound would be a home run for GlaxoSmithKline. There exists minimal competition from other big pharmas. So far, side effects such as nausea and vomiting are less of an issue than other company's drugs in the diabetes market. The needle remains smaller and more convenient. Some minor problems emerged in the trials that may cause FDA concern, which means there will be difficulty in discerning the FDA's response in the matter. What problems constitute sizable issues varies from trial to trial.

GlaxoSmithKline's malaria vaccine, Mosquirix, currently in phase 3 trials, was the subject of a publication in the New England Journal of Medicine very recently. GlaxoSmithKline is participating in the largest malaria vaccine study ever in Africa. The vaccine was successful in reducing malarial episodes by one third in children. GlaxoSmithKline is utilizing a component by Agenus in the vaccine itself. The trial involved 15,460 children, so it will be taken seriously. Side effects were minimal.

Malaria causes 655,000 deaths each year. This is especially for children under the age of 5. It remains unknown how many millions of malaria infections occur annually. Mosquirix has the potential of saving tens of thousands of lives, so the results are quite significant. The World Health Organization has its eye on the study and the vaccine. If outcomes as mentioned above continue, the WHO will push hard to get Mosquirix on the market. I think the end of 2014 would be a reasonable expectation for the vaccine to get to market. Interestingly, a collaboration between GlaxoSmithKline and AstraZeneca (NYSE: AZN) has begun for the purposes of researching antibiotic resistance in bacteria. AstraZeneca’s investigational antibody, MEDI4893, which targets toxins created by staphylococcus aureus, is still in the early stages of development.

Problems

In July 2012, GlaxoSmithKline pled guilty in the U.S. of unlawful promotion of the antidepressant drugs Paxil and Wellbutrin. In addition, the company pled guilty to failing to report safety data on its maligned diabetes medication, Avandia.

Some of the charges were criminal, so GlaxoSmithKline had to pay heavily to have the issue settled for $3 billion. Representatives-employees, as well as physicians, exhibited poor judgment and unacceptable behavior. GlaxoSmithKline's CEO stated the company has learned from the mistakes. A 5 year Corporate Integrity Agreement was signed, with a promise to institute some changes in the corporation.

newsletter was recently released stating that GlaxoSmithKline was found guilty of three breaches of the PMPCA's ABPI Code in Britain. The violation involves Revolade, a drug marketed for ITP, a blood disorder. The accusations stemmed from internal sources. The first breach concerns the marketing of a medication outside its license. The final two breaches encompass the pharmaceutical representatives maintaining ethical standards and regulatory compliance, and for the company to consistently uphold the highest standards. There were also allegations of improper staff training regarding two other medications. GlaxoSmithKline just paid $3 billion in fines for unacceptable or illegal marketing practices. GlaxoSmithKline's executives stated the lesson had been learned and signed a five year Corporate Integrity Agreement. There has been no release of information about agreed upon fines or consequences for GlaxoSmithKline's actions.

Summary

GlaxoSmithKline's third quarter results were poor, but the company possesses excellent compounds in late trials that will be highly profitable if approved. Most analysts have placed a hold status on GlaxoSmithKline's shares. A few analysts recommend GlaxoSmithKline as a buy or strong buy. However, that was before the recent newsletter release. Most analysts' future target price for GlaxoSmithKline are markedly lower than today's price of about $43. Only time will tell what today's events will mean in terms of fines and consequences incurred for another governmental agency violation. All revenue profits will go toward payment of government penalties. If I owned shares of GlaxoSmithKline, I would sell today.


jordobivona has no positions in the stocks mentioned above. The Motley Fool owns shares of AstraZeneca plc (ADR) and GlaxoSmithKline. Motley Fool newsletter services recommend GlaxoSmithKline. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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