Is GlaxoSmithKline A Buy After Avandia Win? Yes

| About: GlaxoSmithKline (GSK)

Opportunities for investors in the pharmaceutical industry are not limited to new companies with breakthrough products -- or breakthrough products at all for that reason. In fact, sometimes a good product gets a bad wrap and comes back.

GlaxoSmithKline (NYSE:GSK) is a major drug manufacturer headquartered in the U.K., and it could be looking at blue skies ahead. Together with its subsidiaries, the company develops a range of pharmaceutical and personal care products. GlaxoSmithKline is the company behind such well-known home staples as Aquafresh, Lucozade, and NicoDerm. On the medical side, the $125.65 billion market cap company creates and manufactures a variety of prescription medicines, from Advair to Zyban and everything in between.

Executive Summary

One of the most successful drugs in GlaxoSmithKline's history is the diabetes drug Avandia -- and that could happen again soon after a favorable ruling from the Food and Drug Administration. GlaxoSmithKline could be poised to produce major gains over the next couple years. Buying in early would be a smart move.


GlaxoSmithKline scored a major victory earlier this month for its diabetes drug Avandia. The drug is otherwise known as rosiglitazone and is a member of the thiazolidinedione class of drugs. These drugs act as insulin sensitizers. In the case of Avandia, this specifically meant helping people with type 2 diabetes lower their sugar levels by sensitizing them to insulin.

Avandia had been a major seller for GlaxoSmithKline at one point, but it became restricted by the FDA due to heart risk concerns from a 2007 study. The restrictions meant that only certified doctors would be able to prescribe the medicine and, even then, only to patients who had tried and failed on other diabetes drugs.

In response to the imposed restrictions, GlaxoSmithKline began a study on Avandia in April 2001 that ran through December 2008. The study, known as "Rosiglitazone Evaluated for Cardiac Outcomes and Regulation of Glycaemia in Diabetes," or RECORD, followed 4,447 type 2 diabetes patients for six years. It tracked rates of heart attack, hospitalization, and death, but its findings were hotly contested -- most notably for being open-label, meaning that the doctors involved knew which patients were receiving Avandia.

As such, GlaxoSmithKline asked Duke University to review the findings from RECORD, and the prominent university largely confirmed the company's stance that the drug showed no increase in heart attacks. "The independent re-examination of RECORD was conducted by the Duke Clinical Research Institute and confirmed the study's original findings: that the risks of mortality and major adverse cardiac events with Avandia in combination with metformin or SU are no different than with a combination of metformin and SU [without Avandia]," explained GlaxoSmithKline on its website.


If GlaxoSmithKline's Avandia gets the final FDA approval and enjoys the same success it once had, the company could be in a position to see sales soar. Avandia is currently prescribed to roughly 3,000 patients in the U.S., down from 2.7 million in 2009. Getting back to that level of success would mean massive gains for GlaxoSmithKline.

Before the diabetes drug became restricted, in 2006, it was bringing in roughly $3.4 billion a year for the company. After the 2007 study claiming the drug increased the risk of heart attacks, sales of Avandia fell roughly by half -- a trend that continued exponentially. Last year, Avandia and Avandia containing drugs earned the company just $10 million.


Now, officials from the FDA advisory panel have ruled in GlaxoSmithKline's favor. "Thirteen of 26 panelists voted to ease restrictions, and seven more wanted the curbs removed entirely," writes the Wall Street Journal. "Five members wanted restrictions unchanged, and one panelist wanted the drug pulled from the U.S. market." So, Avandia could be back on the market soon -- if the company gets a positive final decision from the FDA.

According to GlaxoSmithKline, "the recommendation of the Endocrinologic and Metabolic Drugs Advisory Committee and the Drug Safety and Risk Management Advisory Committee will now be considered by the FDA in making its final decision. Pending the FDA's decision, Avandia will be available through the REMS program to physicians and appropriate patients as an option to help control blood sugar in patients with type 2 diabetes."

Time Frame

The road to recovery is not as simple as deregulating Avandia. First, the panel's decision has to be upheld by the FDA in its final decision. Second, and perhaps just as significantly, there will the public to sway. News of increased heart attack risk, even if it has been disproved, is still a whole heap of bad publicity. It will take a few years to turn the public perception of Avandia around, but that just means there is a larger window of opportunity for investors.

GlaxoSmithKline may be trading at just $51.88 right now, but the same month in 2006 -- when Avandia was still a big deal -- the company was priced close to $57 and was closer to $60 per share in early 2007. Granted, that may have been before the bottom fell out of the finance markets, but there is no reason to think GlaxoSmithKline couldn't get back to those levels with a newly unrestricted Avandia under its belt. That would make for a gain of almost 16% for investors buying in now, to say nothing of the 4.3% dividend yield investors would enjoy per annum until then.


GlaxoSmithKline is a great buy in the pharmaceutical industry right now. Diabetes drug Avandia was once one of its biggest sellers -- bringing in around $3.4 billion a year at its peak -- and it could be again if the FDA delivers a favorable final decision.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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