GlaxoSmithKline: Still A Buy, Despite Settlement

Jul.11.12 | About: GlaxoSmithKline (GSK)

by Brian Huber

GlaxoSmithKline (NYSE:GSK) recently pleaded guilty to accusations regarding the illegal marketing of some of its drugs.

As a result of this plea, the pharmaceutical company will have to pay damages of $3 billion related to the "sale and marketing of its antidepressants Paxil and Wellbutrin and the diabetes drug Avandia". Specifically, the company is in trouble for mislabeling the antidepressant drugs and marketing them for purposes such as the treatment of obesity, anxiety, addiction and ADHD and depression in children which were not approved by the FDA. This is despite the fact that the company was warned of a number of possible side effects that the drug could have when given to the wrong patient population. According to, one of these side effects is an increased risk of suicide in children and teens. Another drug, Avandia, was tested by the FDA and linked to heart problems. Just recently, a new lawsuit involving an Illinois woman claiming Avandia caused her to have a heart attack was brought into the spotlight.

The charges against the company are, in my mind, relatively serious. The reason I say this is because we generally tend to trust what drug companies put on the labels. If the company is mislabeling products or withholding information, this could threaten my safety and on the safety of those I love. And this is, unfortunately, exactly what GlaxoSmithKline chose to do.

This is the biggest health care fraud settlement that we have ever seen in the US. Surely news like this should negatively impact the company and its stock prices. One would think that this would at the very least destroy the company's reputation and faith in its abilities to behave ethically, not to mention the financial impact of the actual settlement. However, if we examine the situation more closely we can see that this is news that has had relatively little impact on GlaxoSmithKline stock, at least so far.

The company has a fairly substantial market capital of over $115 billion. A fine such as this of $3 billion is not, when you consider overall figures, a particularly serious threat to the company's financial integrity. The company is still more than capable of providing a dividend/yield of 2.20 (4.80%) and, although there was a significant dip in share prices in June, the stock is climbing back to the 2012 high it experiences in April. In general it appears that the company will continue to go strong overall. Although GlaxoSmithKline is not doing as well as it once did, it is still a stock to watch.

These are the recent numbers. However, I feel that in the future we could see a marked decline in the stock, especially as Avandia has been pulled from the market. It is not known as being one of the company's most profitable drugs, but its loss will be felt at a financial level. In the long run, however, I think that GlaxoSmithKline will prevail. The stock is currently trading around $46.

GlaxoSmithKline is not the only pharmaceutical company that recently made a significant settlement. Merck (NYSE:MRK) recently paid a settlement amount of $950 million in relation to its drug Vioxx, Johnson & Johnson (NYSE:JNJ) added $600 million to its settlement reserves for dealing with allegations that it offered kickbacks to nursing homes to market its drug falsely, Eli Lilly (NYSE:LLY) has paid a settlement amount of $1.4 billion in relation to its drug Zyprexa, and Novartis (NYSE:NVS) had to pay $99 million in settlement money to its sales reps and staff.

Let's have a look at how these competitors have been affected by their settlement. Merck, for one, seems to be sitting pretty. Its shares are trading at one of the highest rates we have seen this year so far (almost $42). Merck is doing better now than it has all 2012. At the time the news of the settlement hit us the company was trading at about $39, so shares are up almost 10%. Merck is a large enough company for things such as this settlement to make very little difference.

Johnson & Johnson has not yet had to use the money that it has reserved for settlement payments and, now that the backlash form the number of recalls the company had to make has died down as well as the negative press form the kickback case, shares are looking up once again. Johnson & Johnson is trading at its highest level of the year at about $68.

While Eli Lilly (trading around $57) has followed a similar trend to the other pharmaceutical companies in that it has shown an increase for the year, Novartis (a bit lower at about $56) is down since January by a fairly substantial amount. The settlement that it had to pay could also affect other pharmaceutical companies in the near future who may also have to face litigation form sales reps who want to be paid a back pay of overtime. However, as GlaxoSmithKline seems to be (so far) surviving the biggest health care fraud settlement in history, it will probably survive an overtime litigation case as well.

GlaxoSmithKline is still clinging near its 52-week high, which is a terrific sign. It has weathered what will most likely be its biggest storm of the year, and after shelling out $3 billion, if the company can still keep its price steady, it stands to reap great benefit when good news comes around. If all else puts you in doubt, its 4.95% dividend yield should be convincing enough, but I'm still convinced that the company has a good quarter coming soon.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.