GSK sets aside £2.2bn to cover Avandia claims

Legal bills related to diabetes drug will wipe out profits for the past quarter

Glaxosmithkline is to put aside £2.2bn to cover legal costs partly stemming from claims related to its diabetes drug Avandia.

The legal charge, which will be recorded in results for the final three months of 2010, will in effect wipe out the pharmaceutical giant's quarterly profits. Analysts had expected the FTSE 100-listed drug maker to book net income of £1.45bn for the three months to December – less than the £1.8bn post-tax cost of the legal charge announced last night.

Besides covering claims related to Avandia, the provision also covers an investigation by the US Attorney's Office for the District of Colorado into GSK's sales and promotional practices for a range of drugs.

The provision comes less than a year after GSK took a £1.57bn hit for the second quarter of 2010.

"We recognise that this is a significant charge, but we believe the approach we are taking to resolve long stand legal matters is in the company's best interest," GSK's senior vice president, global litigation, PD Villarreal, said. "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 second-quarter charge was also partly based on claims surrounding Avandia. At the time, GSK said it had settled the "substantial majority" of cases related to the controversial drug.

But it has continue to receive numerous new claims against the treatment, which was once the company's second best selling product with sales of around $3bn a year.

"As previously stated, the company has continued to receive new product liability cases regarding Avandia in the United States," GSK said. "The number of new claims received is substantial and the group has now completed its assessment of these additional cases and an estimate of likely future claims".

Avandia sales have been declining since an article by the Cleveland cardiologist Steven Nissen in The New England Journal of Medicine first cast doubt over the drug's safety.

Last year, European regulators recommended that the treatment should be withdrawn after scientific studies discovered a link between Avandia and an increased risk of heart attacks.

The drug remains on sale in the US, however, where regulators decided against a suspension, but imposed restrictions.

For its part, GSK, which said it would work with both sets of regulators and abide by their norms, continues to stand by Avandia, which brought in £391m in total sales for the nine months to September last year.

The US accounted for £197m in sales for the drug, whose US patents are due to expire in 2012. Avandia's European patents are scheduled to run out a year later in 2013.

GSK shares fell by 20p to close at 1,205p following news of the fourth quarter charge. Earlier, they had risen by as much as 1.3 per cent. The wider European pharmaceuticals sector, on other hand, closed with gains of 0.7 per cent on the day.

"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," Evolution Securities' analyst Dominic Valder said.

"There is a new chief financial officer just starting and there is a clear trend in the underlying profitability for 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," Mr Valder added, referring to Simon Dingemans, the former Goldman Sachs banker who is due to take over from the current finance chief, Julian Heslop when he retires in March.

Analysts at Credit Suisse said most of the £2.2bn charge was likely to be related to the District of Colorado investigation, which has also hit other drug companies.

"We believe that over half of the £2.2bn legal charge is related to the investigation by the US Attorney's Office ... This investigation has been ongoing since 2004.

"Other pharmaceutical companies have been investigation and some have paid fines already," they said. "GSK had already provisioned for Colorado but the latest discussions have led to the need for higher provision."