GSK is the worst over?

GSK is the worst over?

Many appear to believe that the worst is over for GlaxcoSmithKline (NYSE:GSK) and now may be the time to step back in and buy the stock. With the stock down nearly 12% since the news broke on Avandia its understandable why some believe this is a buying opportunity. Before putting your hard earned money on the line it may be wise to step back and look at how Merck’s (NYSE:MRK) shares traded before Vioxx was pulled from the market.

Concerns over Vioxx first surfaced when the New Journal of Medicine published the results of the VIGOR study on November 23, 2000. It was not until September 30, 2004 that Vioxx was actually pulled from the market. In between the time the article was first published and the drug was pulled from the market many notable events took place. In 2001 the FDA recommends label warnings for Vioxx which are implemented the following year. At the same time the FDA was discussing label changes for Vioxx they were warning Merck to stop misleading physicians regarding the cardiovascular side effects of the drug. During this time sales of Vioxx continued to grow reaching $2.5 billion in 2003. Finally on September 30, 2004, nearly four years from the date the VIGOR study data is published, the drug is officially pulled off the market.

It’s also interesting to note that over this same period of time there was a similar uproar over how the FDA handled the Vioxx approval. Just as there is today with Avandia, researchers, physicians and politicians were calling for major reforms. Merck also employed a tactic GSK is using today namely mudding the reputation of anyone who comes out against their drug. Also like Merck, GSK is spending millions on newspaper ads defending their drug and appears to do whatever is necessary to protect their Avandia franchise. The final ominous parallel between Merck and GSK is how after the initial sell off in the stocks many believed it was time to jump back in. As the chart below indicates buying shortly after the VIGOR study data was published didn’t exactly turn out too well.

The blue line in the chart is Merck; the red line is the Dow Jones Industrial Average from November 22, 2000 to October 1, 2004. While the DJIA was relatively flat over that time frame as one can see Merck shares lost over 60% of their value. In some respects Merck shareholders at the time had more opportunities to sell as real price erosion in shares didn’t begin until January 2001. As the chart clearly indicates Merck shares fell steadily from January 2001 until right before the Vioxx withdrawal when the bottom fell out.

The big difference between the Vioxx and Avandia situations is the speed in which it plays out. The FDA has already acknowledged they want to put a black box warning on both Avandia and Actos. On July 30th the FDA will convene a panel of experts to determine what additional actions, if any, are necessary. Coming on the heels of Vioxx, Diabetic Investor is not optimistic over Avandia’s future. Physicians have already begun to switch current patients to alternate medications and new patient starts are virtually non-existent. With the ADA Scientific Sessions coming up in two weeks look for a spirited debate on Avandia which will likely accelerate the move away from Avandia. Faced with possible legal action Diabetic Investor does not see physicians waiting around for the FDA to make a decision and will take matters into their own hands.

The one sliver lining for GSK could be that unlike shares of Merck which declined steadily for nearly four years, the pain could be over in a shorter period of time. The worst possible scenario for GSK would be an extended debate over Avandia; this puts investors into limbo as they await definitive action from either the company or the FDA. This is exactly what hurt Merck, the more debate the more uncertainty it created. At the time it was next to impossible for investors to decide if the worst was over or was more bad news coming. To a Merck shareholder at the time it must have felt like Chinese water torture, never quite certain when the torture would end.

Based on how GSK is handling the situation it’s highly unlikely they will throw in the towel and voluntarily pull Avandia from the market. With $3 billion in sales at stake this is understandable. Although no one from the company will comment on this publicly you can bet the GSK legal team is strongly advising against a voluntary recall. To the legal team any such move is tantamount to an admission of guilt and would hurt the company when it comes to defending them when Avandia lawsuits hit the courts.

Diabetic Investor believes there will come a time when GSK shares are once again a solid buy, however that time has not arrived. Just as patients and their phsyicians are switching to alternate medications, GSK investors would be wise to consider alternate places for their money.

David Kliff
Diabetic Investor
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